It just happened again. I met with a new client who’s lived outside the US for over a decade. In that time, she’s built a couple of businesses and has accumulated funds in non-US bank accounts.
She faithfully filed her US tax returns each year, using the same US tax advisor she had used for many years before she moved, and these tax returns looked pretty much the same as they’d looked for many years before she moved. She thought everything was fine—after all, she was paying a tax advisor to look after those things for her.
At some point she saw a news item discussing tax issues related to offshore assets, and she wondered whether she’d been filing everything she was required to file. Who did she ask?
Her trusted long-time tax advisor, of course. Who promptly informed her that her tax returns were completed correctly, and there was nothing else she needed to do.
A Whole New World
After giving me all the facts, I had to break the bad news that her filings have been deficient in several ways. For example, she hadn’t filed:
- an IRS Form 5471 to report ownership of the stock of foreign corporations or
- a Foreign Bank Account Report (“FBAR”) to report the funds held in non-U.S. accounts.
Both of these forms must be filed each year. Even worse, both come with a potential $10,000 penalty each year that they’re not filed on time. (Of course her return needed other changes consistent with the above, and there were other ancillary forms to file as well.)
The bad news gets a little worse. To comply with the Foreign Account Tax Compliance Act, non-US banks are sending reports of their US accountholders to the IRS. These reports mean that the IRS knows all about her inadvertent failure to file FBARs. The clock was ticking.
Fortunately, based on her specific facts, we were able to use an IRS amnesty program to get her back up to speed and avoid all of these penalties.
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A New Fantastic Point of View
US tax is complicated-it’s one of the most complicated areas of US law. It’s impossible for any individual human to be an expert on every single facet of US tax.
For this reason, tax pros absolutely must specialize—that’s the only way to really be useful to clients. A tax pro has two options: either specialize in a particular area (so they can adequately serve clients who need help in that area) or fail to specialize at all (in which case they don’t have a deep enough knowledge about any particular area to actually provide expert advice and assistance to anyone).
In the scenario above, the previous US tax advisor knew how to maximize deductions for a small business, how to file tax returns for partnerships and S corporations, and how to do payroll. These are all important skills for a US-based tax advisor, but they’re worthless once the client moves outside the US
After you leave the US, your tax needs change drastically. Now, you need to know how to structure a non-US business, how to properly report non-US bank accounts, which types of investments and retirement accounts create major US tax reporting headaches, and how to insure eligibility for the foreign earned income exclusion. These are topics that a US-based tax advisor simply does not run across and has no reason to know anything about.
No One to Tell Us No, or Where to Go
Getting a new tax advisor after moving abroad is really doing your old tax advisor a favor. If they’re at all honest (at least with themselves if not with you), they know they’re no longer equipped to deal with the new issues you’ll face. If he or she has any integrity at all, your old tax advisor will actually be glad to see you go.
Similarly, when I have a client who moves back to the US, no longer owns interests in non-US entities, and needs someone to do US payroll tax reporting or file a US entity return, I’m happy to recommend a new tax advisor who can better serve their interests.
New location, new life—new US tax advisor.
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