13 things tax preparers get wrong when preparing IRS returns for US expats
by: Anthony Parent
For the last ten years, our firm has been the leading offshore disclosure firm. We have reviewed thousands of expat tax returns prepared by hundreds of different tax preparation companies, CPAs, and accountants. We reviewed thousands of returns taxpayers prepared themselves using software such as TurboTax. While we have encountered some truly incredible tax preparers and taxpayers alike. However, on the whole, we are not impressed by what has been filed.
One of the reasons why our law firm advocates so strongly for a reform international taxation is that the tax industry and taxpayers alike are simply unable to keep up with the intense demands the IRS foists upon US expats. Don’t believe how complicated US tax preparation for the American exptatriate is? See if you can answer these questions.
1. Do you have a foreign retirement or pension plan?
If you weren’t asked about who contributed more, your employer or yourself, you might have a big problem on your hands. If your preparer just reported the income and did not analyze whether a 3520 or Form 3520-A was required, you could have a $20,000 penalty exposure. For one year alone.
2. Do you have foreign real estate?
Under the tax reform of 2017, real estate taxes are not deductible at all on Schedule A. You need to find another place to deduct these expenses, or you will lose the deduction.
3. Foreign commercial property depreciation.
This is often done incorrectly. The first mistake is that tax preparers will often use another country’s depreciation schedule. But the IRS is not interested in foreign schedules, bur rather, you must use US deprecation. But you can’t use the standard 27.5 year schedule. But rather, you must use a 30-year schedule for foreign real estate. It was just 40 years, but this was changed by tax reform.
4. Foreign tax credit (FTC) v. Foreign earned income exclusion (FEIE) analysis.
The FEIE is often much better than the FTC for Americans living overseas. The reason is that tax credits must be separated by type of income to see what they can be offset against. Far too many expats get boxed into paying too much. And it is a problem that can be exacerbated because if you make the the wrong decision you could be stuck with it for five years!
5. Tax Treaties are improperly understood.
Routinely. If they don’t know what a savings clause is, the chances are your tax professional is doing it all wrong.
6. Foreign Life Insurance
Having a non-qualified foreign life insurance policy. and not calculating the growth using 7702(g) computations.
7. Foreign ife Insuance excise tax on premiums
Not using Form 720 for excise taxes due for premium paid to foreign life insurance or annuities.
8. Did you have to get a foreign corporation so you could buy a home?
Have you filed Form 5471 for all years you owned this or any other foreign corporation? If not, you might have a very large problem. Form 5471 penalties are $10,000 per year and can be assessed indefinitely if not unfiled or not filed properly.
9. Simpler filings
Were you advised on using a disregarded entity election (“check the box”) to make your tax filings simpler?
10. Did you engage business with another person overseas?
You might have a foreign partnership. Foreign partnerships, too, can have very complicated form, Form 8865, which also has intense penalties if not filed or not filed correctly.
11. Do you have mutual funds overseas?
Have you been made aware of Form 8621? And election options?
12. Incorrect FBAR filings.
While technically something that does not get placed on a tax return, it is a yearly requirement for many US expats. The confusion is that many tax preparers think it only applies to (1) bank accounts (2) that go over $10,000. This is not true at all. The FBAR applies to many thing aside from bank accounts. For instance, a foreign pension is not a bank account, yet if it has a present value, it may really be something you need to put on a FBAR. Also, the $10,000 is the key figured for when we add up all of your accounts. If the sum of all your accounts goes over $10,000 then an FBAR is likely required.
13. Conversions to GAAP.
The IRS requires all tax returns to be filed according to GAAP Generally Accepted Accounting Principals. Yet, the US is the only country in the world to use GAAP. So are there any income statements or balance sheets that your tax preparer used that are not compliant with GAAP? Then your tax preparer could be setting up for massive penalties bomb — foreign informational returns like Form 3520-A, Form 5471, Form 8865 can be hit with penalties of $10,000 each per year, all because you use the wrong accounting method.
If you would like us to take a look at your situation, please contact us at firstname.lastname@example.org or give us a ring at 888-477-4258, or hit the Skype icon above to intiate a chat with us. We’ve helped thousands of Americans overseas remove their IRS worries, we’d like to do the same for you.
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