Top 13 things US expat tax services get wrong when preparing returns

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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.

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 me? Well this is our top 13 list of what most tax preparers and taxpayers get wrong about filing US income tax returns for US expatriates.

#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 and/or Form 3520-A was required, you could huge penalty exposure.

#2 Do you have foreign real estate? Under the tax reform of 2017, real estate taxes are not deductible on Schedule A. You need to find another place to deduct these expenses, or you will lose the deduction.

#3 Foreign commercial property depreciation.The first mistake is that tax preparers will oftwn use the depreciation schedule of the country in wich the property is located. This is completely wrong.

#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 separates by type of income to see what they can be offset against.

#5 Tax Treaties are improperly understood. All the time. If you they don’t know what a savings clause is, the chances are that your tax professional is doing it all wrong.

#6. Having a non-qualified foreign life insurance policy and not calculating the growth using 7702(g) computations.

#7. 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 shares in a foreign corporation? If not, you might have a very large problem. Form 5471 penalties are $10,000 per year and can be assessed for since indefinitely if unfiled or not filed properly.

#9 Were you advised on using a disregarded entity election (“check the box”) on IRS Form 8858 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 requirement, 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 FBAR filing. 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 that (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, otherwise known as 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 From 3520, Form 926, 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.

Can you think of anything you were given some bad advice about? We’d like to know. Living overseas shouldn’t be an anxiety filled melodrama, so if you would like us to take a look at your situation, please contact us give us a ring at 888-477-4258. We’ve helped thousands of Americans overseas remove their IRS worries, we’d like to do the same for you.

Like and share if you found this video helpful and be sure you have subscribed if you have not done so already. This is Anthony Parent of Parent & Parent LLP and I thank you for watching.


Lia says:

It would be nice if you could add a video showing expats how to fill out 1040 forms.

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