Don’t Ruin Your FIRE Strategy with International Tax Compliance Issues

Hey FAANG FIRE!

Last year, I partnered with Jane Mepham CFP, to help us all better understand the details of “FIRE Planning While on a Work Visa”. I started following Jane after reading her detailed guide on Kitce’s blog focused on educating her fellow financial planners on investing for retirement while on a work visa. If other planners turn to Jane for guidance, I knew that we would be in good hands.

A few weeks ago Jane reached out to me:

“I have had a couple of your readers reach out to me… Some of them are saving in their home countries in preparation for when they leave the US, but they are missing some gaps in reporting… when you are aggressively saving as much as you can, the worst thing to then have to do is to worry about losing some of that money because you neglected some tax-compliance aspect.”

Jane was genuinely concerned that many of you with foreign assets were unknowingly putting your FIRE goals at risk by not reporting on your foreign assets (either intentionally or negligently). One rule I personally like to live by is to not piss off the IRS (or California Tax Franchise Board); for those on visa the risks can be even greater. This isn’t about fear mongering, it is ensuring you understand the risk you are opening yourself up to. With tax season now in full swing, I’ll let Jane take it from here.

---

Don’t Let International Tax Compliance Issues Ruin Your FIRE Strategy

By Jane Mepham, CFP^®

In today’s post, I’m going to discuss what you need to do to stay tax-compliant with your overseas assets if pursuing FIRE on a work visa.

Last year, I worked with Andre on a detailed guide for FAANG workers in the US on work visas looking to pursue FIRE.

In the guide, I described the challenges you are most likely going to encounter as you work on your FIRE journey. I also gave you possible solutions for getting around them.

Since then, I’ve had some people reach out, and I’ve noticed a glaring hole in what’s happening with overseas assets.

Part of being able to successfully implement the FIRE strategy is saving or minimizing taxes. Having to pay tax penalties because of tax-compliance issues goes against that.

When you are thinking about leaving the US soon, investing in your home country is part of your strategy. But there are tax reporting requirements, and I’m seeing a few misses.

This can be very expensive due to the penalties imposed. They can also impact your chances of becoming a US citizen if you choose to go down that path.

PS: One of the requirements for becoming a US citizen is being a person of good moral standing. Part of this is being tax compliant, and how you answer the question “Have you been compliant with the US tax law?”

So, in today’s post, I’m going to discuss what you need to do to stay tax-compliant with your overseas assets.

I’m going to discuss the following items.

• Worldwide Income Taxation

• Foreign Assets Reporting

  • FBARS – Foreign Bank Account Report

  • Form 8938 – Specified Foreign Financial Assets

• PFICs – Passive Foreign Investment Companies.

File Taxes On Worldwide Income – Stay Tax-Compliant

Once you become a US tax resident or a US person, you need to file taxes on all your worldwide income regardless of where the assets are located.

By now you are probably a US tax resident, but in your first year in the US, there is a chance you could be filing taxes as a tax nonresident. That’s a great time to consolidate or simplify overseas assets if need be. Overseas income can be generated by businesses, overseas partnerships,  rental property, or anything else that gives you some type of income.

Keep in mind that if you are on a work visa like H-1B, T-N, etc., you can only be involved in these businesses (US and foreign) passively. Otherwise, you run the risk of being out of status.

There is a genuine fear of being double-taxed, but tax treaties may mitigate some of these issues. In addition, your tax professional can use the foreign tax credit to mitigate some of the issues once you’ve paid taxes on foreign source income. Regardless of the situation please report everything (all your income).

If you are a green card holder and you leave the US, and you stay outside the country for more than a year, you could lose your immigration residency. However, this does not change your tax status as you are still considered a US tax resident, and you need to continue filing taxes on your worldwide assets. If you don’t give up the green card correctly you could find yourself being treated as a covered expatriate which has its own set of issues.

Other Filing Requirements To Be Tax-Compliant

FBAR FILING

The FinCEN 114 form commonly known as the FBAR is one you might be familiar with. You need to complete this form anytime the combined balance of your overseas financial accounts reaches $10,000 for a single day.

There are no taxes due, it’s simply a reporting requirement.

This number is very easy to hit unwittingly.

Example 1:  You send money overseas to your cousin; it hits your account first which has some money. Added to your other smaller accounts – you suddenly have 10k+ under your name. Two days later you move the money to your cousin’s account. Guess what, you need to file the FBAR when you file your taxes the following year.

Example 2: Your dad decides to add your name to his account back home, giving you full access. He’s been wanting to start sharing his wealth, and he figures this is one way of doing it. The account has more than 10k.

Your dad is probably going to hate it, but you need to file the FBAR the following year.

The accounts in question include brokerage accounts, bank accounts, insurance accounts, etc. 

The form is due April 15^th with an automatic extension to October 15^th. You must file the FBAR electronically through FinCEN’s BSA E-Filing System. You don’t file the FBAR with your federal tax return.

FAILURE TO FILE THE FBAR, FAILURE TO BE TAX-COMPLIANT

Failure to file the FBAR is a clear case of not being tax-compliant with an overseas asset. It can cost you up to 50% of the account’s value in penalties.

In a recent case, Bittner V. United States the Supreme Court ruled that the penalty is per form not per account – in case you have multiple accounts you did not report. The key thing is, there are penalties involved.

It’s no use hiding as foreign banks are very eager to tell the IRS what you own due to FATCA rules. If they (the foreign bank) fail to comply it could cost them up to 30% of the account value. 

I found out a while back just how eager the banks are to tell on you. Here is my story with my overseas bank, telling me how they were reporting me and others to the IRS.  Is the IRS reading your mind Re – your foreign accounts?

(PS: I have overseas accounts like most of you and go through the same reporting requirements every year).

FORM 8938 – STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS

This is the next form filed with your taxes to report overseas assets.

The form is used to report certain assets. The definition I have seen from CPAs of what these assets are is a specified foreign financial asset is any financial account maintained by a foreign financial institution.

The current reporting threshold is 50k on the last day of the year or 75k at any point during the year – if single and twice that much if married. Failure to file this form can cause some serious penalties.

According to the IRS, if you fail to file this form, you could be subject to a penalty of up to $10,000 and an additional penalty of up to $50,000 for continued failure to file after IRS notification. In addition, there could be a 40% penalty on understatement of tax attributed to non-disclosed assets.

Some assets must be reported on both forms (FBAR and Form 8938), but the information required on either form is different.

GETTING TAX COMPLIANT WITH OVERSEAS ASSETS

If you have missed filing these forms at any point, all is not lost. The IRS is aware of the fact that there are people who have not filed and has provided a solution that will allow you to be tax compliant.

It’s also not unusual as there are a lot of people who are not aware of the filing requirements. I have seen quite a few people having to go through what I’m about to describe. 

You have a chance to rectify the issue through the Streamlined Filing Compliance Procedures. This is an IRS process that allows you to amend previous returns.

It’s best to reach out to a tax professional who understands the process to help you rectify things.

Passive Foreign Investment Company (PFIC)

Last week, I had a conversation with somebody who’s been investing in Indian Registered Mutual funds, and I had to explain to them why this was not a good idea for somebody living in the US.

In our desire to diversify – a lot of people are investing back home in assets they are familiar with.  This is one type of asset you don’t want. Most foreign-registered mutual funds or ETFs fall into this category. They are called PFICs (Passive Foreign Investment Companies).

In the past people had used this type of foreign corporation to avoid paying taxes, but all changed in 1986 when the IRS implemented new regulations. To discourage their use, the IRS taxes them punitively at the highest rate. They are reported and taxed via IRS Form 8621 which is very complicated to complete.

The IRS estimates that each form (each fund needs its form) may take more than 40 hours to complete. It’s a form most tax professionals don’t like at all. If you need to complete this form, it’s probably best to do it with the help of a tax professional and then plan to get out of these investments and get into something different.

If the funds are in a retirement type of account and there is a tax treaty between the US and the foreign country, there is a chance they could be exempted from the PFIC reporting, but you might still need to complete the other forms.

Conclusion

It’s okay to invest in your home country on your FIRE journey in the US, just make sure you stay tax-compliant with those overseas assets, by taking care of the above issues.

---

Andre’s Thoughts

I want to thank Jane for her insights. One of the most important skills I've developed is building a network of people like Jane, who are experts in very specific topics. It is impossible for one person to know everything about finances, the real secret is building up a network so you can be 2 degrees away from someone who is an expert.

We also now have two articles from Jane on tips for FAANG FIRE while on a work visa. This is very niche, so I am curious what you all think. If there is enough interest I would love to have Jane come back as part of a recurring series all around FIREing on a work Visa.

You can reach out to Jane through her website, Elgon Financial Advisors, where she focuses her financial planning on helping foreign nationals in the US on work visas, foreign-born individuals (citizens and green card holders) pursue their American dream, and US residents working outside the country. You can also hear from her on her new podcast The International Money Café, a podcast about cross-border finance, taxes, and compliance.