“IRS and hurricanes: when they hit… lots of screaming and somebody loses his house.”
(Edmund Heaslip, Chartered Accountant ACA)
U.s. tax, FATCA, SFOP und FBAR
The IRS requires US citizens in Germany to do US tax returns, and has voluntary declaration programs, willful and non-willful, for this purpose – Introduction to U.S. Tax
Unlike citizens of Germany who are only subject to tax in Germany if they live here or have income from sources within Germany, US citizens (even those with dual German-US citizenship), Greencard holders and persons who meet the so-called “Substantial Presence Test” are subject to taxation in the USA on their worldwide income regardless of where they live or the source of their income because the US has a citizenship based tax system.
Any US citizen with worldwide income of the equivalent of $10,000 (US dollars) is required to file a US tax return annually even if no tax is due. US citizens are also required to file annually a report of financial accounts held at financial institutions located outside the USA.
Citizenship Taxation – A Uniquely American Approach
The US is the only major country to tax its citizens on their worldwide income no matter where they live. Equally important, the US applies its Internal Revenue Code to its citizens living outside the United States as if they were living in the United States. In other words, all aspects of the US Tax Code apply to US citizens living in Germany, creating tax situations for them that do not exist for their fellow citizens living in the US.
Another not generally known fact is that everyone born within the borders of the US is a US citizen even if his or her parents were in the US only temporarily for study or work. Even if the person never obtains a US passport or social security number, he or she is a US citizen and subject to US taxation on his or her worldwide income. Not surprisingly, the conjunction of US birthright citizenship and citizenship taxation surprises many dual national US citizens living abroad. More often than not, these dual national German-Americans are unaware of their US tax filing obligations and, as a result, are not current with their US tax filings.
FATCA: Foreign Account Tax Compliance Act, a new US enforcement mechanism
Until recently the US Internal Revenue Service (IRS) could not easily detect non-filing by US citizens living overseas. That changed dramatically in 2010, when the US Congress passed The Foreign Account Tax Compliance Act (FATCA for short). FATCA imposed two regimes: one affecting individual US citizens and one affecting non-US financial institutions. The first required US citizens beginning with the 2011 tax year to file an additional form with their US tax returns identifying foreign financial accounts. The second requires non-US financial institutions to report US account holders to the IRS.
As of July 2014, German financial institutions have had to institute due diligence procedures to establish when a new account is opened whether the account holder is a US person. These ‘US accounts’ have been reported to the IRS since 2015. From December 2015, German financial institutions have been required to report the existence of any pre-existing ‘US accounts’ at their institutions that had a balance of $50,000 or more. In effect, FATCA turns the tables in favor of the IRS by making foreign financial institutions give the names of their ‘US account’ holders to the IRS rather than forcing the IRS to discover these foreign financial accounts. In other words, the IRS will soon know which US citizens have financial accounts overseas and whether or not they have filed US tax returns or bank reports.
SFOP (Streamlined Foreign Offshore Procedures): filing Delinquent US Tax Returns and FBARs
On June 18, 2014, the IRS announced the adoption of Streamline Foreign Offshore Procedures (SFOP) for US citizens residing outside the US who can establish that their non-filing of US tax returns and FBARs was non-willful. Any US citizen living overseas who honestly did not know of their US tax and bank report filing obligations is eligible to use the SFOP. The SFOP requires US citizens to file tax returns for the three most recent tax years for which returns have not yet been filed and FBARs for the six most recent tax years without incurring any FBAR or tax penalties. Any tax that may be due for any of the three years must be paid plus interest, but all non-filing and late-filing penalties are waived. The SFOP offers US citizens an excellent chance to become compliant with their US tax and bank report filing obligations without incurring penalties.
FBAR: Foreign Bank Account Report
As if filing US tax returns was not pain enough, all US citizens are also required by US tax law to file annually an FBAR (now called a FinCen 114) if the aggregate of the highest account balances in all of their financial accounts located outside the US exceeds the equivalent of $10,000 at any time during a tax year. The FBAR filing requirement is separate from the US income tax return and has a different filing deadline (June 30) than the tax return (June 15).
Penalties for not filing FBARs can be significant. Non-willful failure is subject to a fine of up to $10,000 per account per year. Penalties for willful failure to file FBARs can involve civil penalties of as much as 50% of the high balance of each unreported account for each year that it is not reported and to criminal penalties.
Proper Coordination of Germany and U.S. Tax Filings is Essential
Remember, the US taxes its citizens as if they lived in the US. This presents unique challenges to US citizens residing in Germany to make sure that the taxes paid in Germany are properly presented on their US tax returns. It also requires that their activities in Germany be assessed in light of how they will be taxed in the US and whether special US tax information returns are required and, if so, properly prepared. We believe it is prudent for US citizens living in Germany to coordinate their tax filings in both countries using the coordinated services of firms with expertise in each country. We at MTG have our own tax experts as well as access through our international association to tax experts in the US, and would be delighted to help you coordinate your tax returns in each country.
AGN International Ltd (and its regional affiliates; together “AGN”) is a not-for-profit worldwide membership association of separate and independent accounting and advisory businesses. AGN does not provide services to the clients of its members, which are provided by Members alone. AGN and its Members are not in partnership together, they are neither agents of nor obligate one another, and they are not responsible or liable for each other’s services, actions or inactions.
Do you have any questions about international service?
Your contact partner will be pleased to hear from you!