Edvenson Consulting

English Services, American Legal & Tax Services 


Taxes and Death: Tending the Tax Garden

Posted on September 23, 2011 at 7:00 AM

I am thrilled to announce that my blog is not dead! In the past weeks, it experienced a remarkably low profile, indicating that since I, the author, was no longer a ‘member’ of the site, the entries could not be displayed. To this, I must say that the new-fangled world of ‘IT’ certainly has a sense of humor. In truth, I am not only a member of this site. I wrote it. And I write it. I enjoy it also, and tend it, as a good gardener. Of course, now the days in Norway are getting chilly, and the darkness is already approaching us; both dawn and dusk encroach on our vision. Uff da meg. The gardener is busy putting tended issues to bed for a while. A bit of pruning, a bit of complaining.


Meanwhile, the American Embassy has, this calendar year of 2011, managed to awake the sleeping Americans living here to their duty to file their personal income tax forms with the U.S. Internal Revenue Service, setting off screeches of fear and quaking of the knees. I’ve been the recipient of a fair amount of resulting tax work, and have widened my familiarity with various fact and income patterns . . . the hard way, in some cases: by having to re-file some of my clients’ tax forms.


But let’s speak about taxation. It has been awhile. Here are my latest gripes, the first of which is probably of greater interest to tax preparers than to tax clients.


The IRS requests that we complete the Foreign Earned Income worksheet to determine one’s taxable income. When this is not used (inadvertently, in part because it is a relatively new tax calculation requirement and in part because it is not placed intrinsically into the tax form itself), instead using the standard U.S. Tax Table, the tax appears to be under-stated. Using the Tax Table, it is only under-stated to the extent of the foreign earned income exclusion (Form 2555 and 2555-EZ), which is a convenient formulation for writing down one’s foreign earned income - income that has already been taxed in a foreign country – in our case, Norway. So when one uses the Tax Table, the tax is lower. However, any resulting foreign tax credit calculation (Form 1116) would show the IRS that the level of actual tax paid to Norway on the income was sufficient to cover even the larger amount of tax that would have resulted by use of the Foreign Earned Income worksheet for calculating tax. And let’s just say that the Form 1116 was included in that package of materials that did not use the Foreign Earned Income Tax worksheet, but did use the Tax Table to calculate the tax . . .


If you are still with me here, please note: Instead of the IRS, then (a) informing the tax client by mail that they should complete the Foreign Earned Income tax worksheet and re-file their forms (i.e. since they can see that the taxes paid to Norway are sufficient to cover the difference), the IRS instead does (b) informs the tax client by mail that they did not utilize the Foreign Earned Income worksheet to calculate their tax and should therefore immediately pay $8,765 dollars to the IRS, or will be subject to extreme penalties and possible legal action.


The ‘immediately pay’ part is tricky: since the payment to the IRS is due within 30 days of the IRS’s letter date, and the letters never arrive before exactly 30 days have elapsed, the payment is due on the date the letter is opened by the unsuspecting American overseas in, for example, Norway, who, to be honest, does not owe a penny to the IRS.


This brings me to the title of this entry: The IRS does not realize that this type of letter reply is not only questionable from the standpoint of “good faith business practice,” but could cause its recipient to have a heart attack or stroke, thus unintentionally causing their death. As for me, I will stick with the argument that this type of letter reply is, quite truthfully, exhibiting a lack of GOOD FAITH and FAIRNESS in BUSINESS PRACTICES.


Sadly, I don’t even want to speculate as to how many Americans overseas, around the world, who are paying taxes in their country of residence, have received this particular letter and responded by immediately wiring off the required payments to the IRS when, if they would re-file their forms using the FEI Worksheet to calculate their taxes, they would very likely not owe the IRS a penny, and, even if they had shown the IRS what their foreign taxes paid figures were, the IRS sent them that bill. Shameful!


Is anyone reading this? If so, glad to hear from you, albeit briefly.


This brings me to point number 2. The United States would like all Americans to file their foreign bank account numbers and totals with them, for their information. I have written about this before. The general area of concern is called: FBAR. FBAR stands for Foreign Bank and Financial Accounts Report.


First, it seems a reasonable enough requirement that all Americans living in the U.S. should have to do this. The point is: they should not be able to skip paying taxes to the U.S. simply by managing, in one way or another, to park their change in foreign countries’ banks.


My first gripe with this law is, therefore, conceptually simple: Americans who live and work overseas, hired by foreign companies and/or working solely in foreign lands, paying their rightful personal income taxes to those foreign lands, are already doing what they should have to do, given the tax treaties between the U.S. and most nations. Thus, double taxation is avoided. Therefore, why should they not fall under an exception to the rule that requires that they report their bank accounts and account numbers as well as highest yearly balances in those accounts to the U.S. Department of the Treasury?


This is not a rhetorical question. This is a real question.


FBAR II: A flurry of e-mails appeared in my inbox after the Democrats Abroad of Stavanger sent a relatively scary e-mail around to those on its e-mail list, identifying a series of dates for filing the FBAR form, links for where to find the latest version, and indications of what might happen to persons who did not file this information with the U.S. government. Therefore, it is time to update my previous entry on this topic. Not because I understand any more fully why the U.S. government insists on requiring this information from Americans who live and work overseas while paying taxes overseas as required. Why? Because, there is a new revision of the form which is to be filed. In other words, I remain clueless when I was recently quizzed on both the conceptual justification for requiring this of us – or at least those of us with at least the equivalent of $10,000 in a foreign bank account – or stocks or securities, and what would happen to someone who wanted to do the right thing, but had happened to not hear of it until after the latest drop-dead deadline of September 9, 2011. My answer was: (1) I don’t know, and (2) I don’t know. I will try to find out. In the meantime, the new FBAR filing form can be found here,  and is called the TD F 90-22.1, revised March, 2011 (and don’t use previous versions!).


According to the information I am aware of, one should file these forms if one qualifies as required to file them. The IRS advises those who have filed their income tax forms, but who have not filed their FBARs, that they should file the delinquent FBAR reports (back to 2003) and send them to the Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621, also attaching a statement explaining why the reports are filed late. Non-intentional non-filing is also subject to penalty.


What, you say? Listen, I’m going to work on this and try to obtain more clear information as to the consequences for those who have not yet filed the FBARS but are supposed to have done so. Meanwhile, my question as to why overseas Americans should be required to file this information remains, to my mind, a very good question, one in need of a better answer than is found to date in any online resource, including the Department of Treasury. My tentative thoughts are that this could be an appropriate agenda item for the House of Representatives Committee on Ways and Means.


As recently as this past June, 2011, this House Committee heard testimony from Robert Stricof, Tax Partner at Deloitte Tax LLP, concerning the collection of foreign banking information with respect to foreign-based companies with U.S. interests, in an inquiry into whether foreign companies were engaging in “earnings stripping” to pad their deductible expenses paid to foreign parties. He indicated that the related reporting forms had been unclear since they were released 4 years ago, and nothing had been done to either clarify the related forms or to determine if they actually even managed to achieve their purpose.


With the FBAR, let’s go further, much further. I am forced back to my first question, above: What is the financial interest of the U.S. government in individual Americans’ bank account balances in foreign countries when they do not spend significant time in the U.S., have no special employment-related ties to the U.S., and live and work, for all intents and purposes, legally within countries with which the U.S. has agreed tax treaties assuring no double taxation? Should they not be subject to an exception to the requirement for filing of the FBAR forms?


You are welcome to forward this message. Alternatively, since our language is devolving as we speak, you can also, sadly, ‘like it’ or ‘not like it.’  As for me, I've got work to do:  it's already getting dark outside.

Categories: Law Stuff, Auditing Stuff, International Miscellaneous