Introduction …
Since beginning the draft of this post, I have written a separate post:
Homelanders (and most U.S. tax preparers) really don’t understand the problem of “forms”. They seem to think that filling out, say Form 8938 is like completing a survey. The post referenced in the above tweet was an attempt to explain what the “form thing” is really about. well, I tried …
Forms and the life of an American citizen …
No lie. This sign really is in Dublin Airport. It’s all about forms!
Prologue – Speaking of Americans abroad – “For Whom the Bell Tolls”
Americans abroad of yesteryear: Ernest Hemmingway -For Whom The Bell Tolls
“For Whom the Bell Tolls” is a novel written by the great American author Hemingway. The book was apparently written by the author, as an American abroad, in Cuba. Interestingly the story is about an “American abroad” in Spain (while he was involved in the Spanish Civil War.)
In 2015, there are still Americans abroad. Some of them may be writers. Some of them may be soldiers. All of them are subjected to a certain “Form Tyranny” (or should I say a “Form TERRORany”).
In general, Americans abroad are, under threats of sanction, if they don’t report most aspects of their financial life to the U.S. Government. The “form” has become a weapon of financial terrorism.
The general principles of “reporting requirements” and “information returns”
Americans abroad of this year – For Whom the “Form” Tolls
Title 26 – AKA – the Internal Revenue Code – codifies those “revenue raising” measures of the United States that are referred to as taxation. Broadly speaking, the rules in the Internal Revenue Code consists of two groups of Rules.
Group 1 – These rules require “information reporting”. In general these rules do not directly impose taxation. These rules require that “information” be provided (under threats of penalty). This “information” provides the “trail” to calculate the amount of tax that is owing. These rules require the “disclosure of information. The information is disclosed/communicated on various forms. The “forms” are often referred to as “information returns”.
In some cases the taxpayer affected must disclose the information to the IRS (Form 8938). In other cases a third party must disclose the information to the IRS about the taxpayer (Form 1099).
Groups 2 – These rules are used to calculate the amount of tax owing. In other words, these rules apply to information (some of which may have been disclosed on “information returns”) and are used to calculate actual tax liability.
A “simple” (not really) example of a rule to calculate “tax liability” would be S. 1291 of the Internal Revenue Code. This rule is used to calculate the “Interest on tax deferral” tax that you have received by purchasing shares in a Canadian (or other “foreign”) mutual fund. You will owe the IRS money because Canadian mutual funds are (because they are foreign) “sacred instruments of tax deferral”. These rules are designed to achieve (from the perspective of the USA) “tax justice” for those Americans abroad who did NOT buy U.S. mutual funds. It’s obviously unjust to U.S. mutual fund companies (NOT), that “red white and blue” blooded Americans, living abroad would NOT buy mutual funds from a U.S. fund company.
The Government of the United States believes that those Americans abroad who purchased “non-Homeland” mutual funds should be punished. They must be brought to justice. S. 1291 of the Internal Revenue is for the purpose of delivering that justice. It does so by imposing penalties on Americans abroad who buy “foreign mutual funds”.
As President George W. Bush would say:
- Whether we bring our enemies to justice or bring justice to our enemies, justice will be done.
The extraordinarily punitive provisions of Internal Revenue Code S. 1291 are to bring Americans abroad to justice. Their crime? Usually attempting financial planning with by using financial products in their country of residence. Americans abroad are required to live by the principle:
“When in Rome, live as a Homelander!”
To put it simply, when it comes to the Internal Revenue Code of the United States:
Some rules are required to force the disclosure of information. Some rules are required to calculate the appropriate amount of taxation. Therefore, when considering the requirements of the Internal Revenue Code, it’s important to consider:
First, are there rules that require me to disclose information?
Second, what are the rules to calculate the correct amount of taxation.
(You should consciously think about both kinds of rules.)
Third, might there be “special provisions” for “special people”?
Americans abroad: Special people, special provisions, special “reporting requirements”
The United States has identified Americans abroad as being deserving of special rules and special provisions. The statutory authorization for many “reporting requirements” is found in:
26 U.S. Code Part III, Subpart A – Information Concerning Persons Subject to Special Provisions
It includes the following:
- § 6031. Return of partnership income
- § 6032. Returns of banks with respect to common trust funds
- § 6033. Returns by exempt organizations
- § 6034. Returns by certain trusts
- § 6034A. Information to beneficiaries of estates and trusts
- [§ 6035. Repealed.]
- § 6036. Notice of qualification as executor or receiver
- § 6037. Return of S corporation
- § 6038. Information reporting with respect to certain foreign corporations and partnerships – Form 5471
- § 6038A. Information with respect to certain foreign-owned corporations
- § 6038B. Notice of certain transfers to foreign persons – Form 3520
- § 6038C. Information with respect to foreign corporations engaged in U.S. business
- § 6038D. Information with respect to foreign financial assets – FATCA Form 8938
- § 6039. Returns required in connection with certain options
- [§ 6039A. Repealed.]
- [§ 6039B. Repealed.]
- § 6039C. Returns with respect to foreign persons holding direct investments in United States real property interests
- § 6039D. Returns and records with respect to certain fringe benefit plans
- § 6039E. Information concerning resident status – Passport Application
- § 6039F. Notice of large gifts received from foreign persons – Form 3520
- § 6039G. Information on individuals losing United States citizenship – Form 8854
- § 6039H. Information with respect to Alaska Native Settlement Trusts and sponsoring Native Corporations
- § 6039I. Returns and records with respect to employer-owned life insurance contracts
- § 6039J. Information reporting with respect to Commodity Credit Corporation transactions
- § 6040. Cross references
As I have indicated, these rules provide the statutory authorization for some of your favorite forms. I suggest that you read some of these sections. Notice that they all require the disclosure of information, “in such manner as the Secretary may prescribe” and prescribe an penalty for not providing the information. In general you can expect a $10,000 penalty.
(S. 6001 of the Internal Revenue Code gives the Secretary of Treasury the authority to makes rules and create the forms necessary to implement these reporting requirements. S. 6001 of the Internal Revenue Code reads as follows:
Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. The only records which an employer shall be required to keep under this section in connection with charged tips shall be charge receipts, records necessary to comply with section 6053 (c), and copies of statements furnished by employees under section 6053 (a).
To put it simply, these sections of the Internal Revenue Code:
Require that you provide information to the government, in the “form” required by the IRS. The failure to report will subject you to the usual penalty. That said, most (if not all) of these requirements are subject to the “reasonable cause” defense.
Note that many of these “reporting requirements” deal with things that are “foreign”. As you know:
When the word “foreign” appears in the Internal Revenue Code, the word “penalty” is sure to follow.
Please note that these sections impose an “independent obligation” to provide information. They do NOT impose taxes. The information provided will be used to calculate the appropriate amount of tax, that should be paid by the taxpayer.
Failure to complete the form results in “Form Crime”.
Warning!!! “To be “FORMwarned Is To Be FORMAred!”
Citizenship Taxation - Theory vs. Reality 