Tax, Finance, CE, CPE, EA, CPA, CFP Blog: Tax Rules From CPA ...

Accountants are often called upon to use the information studied in CPA review classes about US citizens living abroad. These individuals almost always hire CPAs to prepare their tax returns. The US is the only major country that taxes the worldwide income of its citizens. Most countries determine tax liability based upon residency. But the IRS expects US citizens to pay tax on money earned in a foreign country ??" even amounts already taxed by that country because the taxpayer lives there. Fortunately, one of the key rules described in CPA exam courses is that a taxpayer gets a credit against his US tax liability for any foreign taxes paid. In addition, a portion of foreign earned income is typically excludable from US tax. CPAs usually need to explain to individuals living abroad that the credit and exclusion might not offset the entire US tax assessment. When that arises, a taxpayer owes US tax on income earned in another country and already taxed there. A surprising number of people are learning that they are US citizens. For example, many people who were born in Canada and lived there for their entire lives have a parent who is a US citizen. That is sufficient to provide US citizenship for these Canadians. They are faced with failure to file tax returns for several years. In order to comply with the tax filing requirements, they will likely need accountants with training from CPA preparation to interpret income records, compute the foreign tax credit, and determine US tax liability. The US implemented the Foreign Account Tax Compliance Act in 2010. This law requires foreign financial institutions to report information to the IRS about accounts of US citizens starting in 2013. Although some banks are resisting, those that refuse to comply face a 30 percent withholding tax on all payments from the US. That stringent act of retribution has led some European banks to simply drop their US customers rather than comply with the IRS reporting demand. This creates a substantial burden on US citizens who are working and living abroad. Tax accountants already follow the rule emphasized in CPA exam review to reveal foreign financial accounts on anyone’s US tax return. A special form is submitted to the IRS when the aggregate of account values exceeds $10,000. Failure to submit the form results in a possible $10,000 penalty. Disclosure is required of bank accounts as well as brokerage accounts, mutual fund holdings, and even pension funds in foreign countries. The aim of the IRS is clearly to locate accounts where US citizens are hiding their foreign earned income. An extreme response from some individuals has been renouncing their US citizenship. Over 1,800 people renounced their US citizenship in 2011. This is more than the combined number from 2007 through 2009. The popular press has denounced all these individuals for avoiding tax obligations to their country. However, information from CPA review courses about who owes US tax conveys a different story. Millions of individuals living abroad face harsh consequences from being born to US citizen parents or being unable to open a bank account
for depositing foreign earnings that were already taxed. IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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