# Streamlined filing of 8832 vs 5741



## leap29

Hello All,

I've been reading through this forum which has been very helpful but I've got a few questions. Please excuse me if these questions have been asked before and if so I'd appreciate a friendly pointer to the appropriate threads. 

*First a bit of background*

I'm a UK citizen married to a dual UK/US citizen for 7 years and we are intending to emigrate from Scotland to the USA in about a year. However, my wife left the US about 12 years ago and hasn't filed a 1040 since. So when we start the immigration visa process I'd prefer we'd started the tax compliance process rather than the IRS initiate things from their side (with all the penalties / issues that would arise from that).

My wife and I both own 50% each of a UK private limited company (founded 2003). She is not an employee and to minimise the tax due in the UK we take most of the money out of the company as dividends (roughly £40k each per year). This company is really an invoicing vehicle for computer consultancy and so isn't dependent on capital injections from me or her. It should probably be noted that I'm the only consultant that earns income and my wife does the occasional bookkeeping task.

*My Current Understanding*

So to bring my wife's US tax obligations to compliance I understand she can file under the "Streamlined Foreign Offshore Procedures". This would consist of 3 years delinquent 1040s (plus supporting forms) and 6 years FBAR. As the automatic 2 month extension for the 2013 tax year expired on June 15 2014 I'm assuming she needs to file delinquent 1040s for 2011, 2012 and 2013 and FBAR for 2008 - 2013.

To make things slightly simpler I'd like to be able to treat these dividends as earned income so that she can make use of the FEIE to reduce the tax obligation to zero. I believe this is possible as capital is not a factor in the business and IRS publication 54 states:

"Capital not a factor. If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. The entire amount of business income is earned income.
"

However to do this I believe the company would need to be declared as a partnership on form 8832 and as I've mentioned earlier the company has been trading for 10 years. So I'd like to back-date the 8832 to start on the 1st of Jan 2011 but this is clearly way outside the 75 day rule.

*Questions*

1) Does the Streamlined Foreign Offshore Procedure also cover filing the 8832 (very) late?

2) Does the partnership declaration for the company make the most sense? 

3) Is there other tax that would become due that we haven't considered like self employment tax and can this be offset with the tax we've already paid on dividends and UK corporation tax?

4) If we've missed the boat on the 8832 or keeping the UK LTD as a corporation for US tax purposes makes the most sense, then is there a way of offsetting some of the tax that would be due on the dividends? (again we've paid UK tax on the dividends and the UK LTD pays corporation tax).

Thanks for your time.


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## Bevdeforges

Ooh, this is a bit tricky and is going to call on your "interpretation" skills a bit.

You say your business is a "private limited company" - as opposed, I suppose, to a "public limited company." It's possible that she may not need to report her ownership interest at all, as the FATCA forms generally apply only to "certain" foreign corporations in which a "US person" holds a 10% or more interest. Only certain types of business entities are considered "corporations" in the IRS sense for FATCA - though it takes some wading through search results on the IRS website to get a definitive list.

OTOH, your desire to characterize dividends as "salary" may not fly. For FEIE purposes, "earned income" needs to reflect the actual work that she puts into the business - though if she is doing bookkeeping for you, that makes the argument that what she is being paid is "salary" and thus eligible for FEIE treatment. 

However, on the self-employment tax issue, it's assumed that if she is exempt from US social security that she is paying into the local (i.e. UK) system - that is to say NI - as part of her salary.

You can try reporting it as "salary" and see if it flies. (Chances are it will.) Personally, I would not report the company either as a partnership nor under the rules about a US person with 10% or more interest. Again, it should fly unless there are other issues that would lead the IRS to examine her forms more closely.
Cheers,
Bev


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## BBCWatcher

You said "minimise the tax due in the U.K." What's the approximate effective tax rate on that income? How about taking the U.S. Foreign Tax Credit on that income instead, or making a tax treaty claim if one exists?

As a first principle, I'm uncomfortable with the notion of making two opposing arguments about the nature of income to two different tax agencies -- especially agencies that routinely talk with each other.


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## StewartPatton

leap29 said:


> *Questions*
> 
> 1) Does the Streamlined Foreign Offshore Procedure also cover filing the 8832 (very) late?


No, unfortunately it doesn't. So, the entity was a corporation for U.S. tax purposes for the three tax years you will file under the SFOP, and there is nothing you can do about that right now.



> 2) Does the partnership declaration for the company make the most sense?


No, it doesn't--it is better to operate through a corporation.

A US citizen operating through a non-US corp can avoid all US tax as long as they (i) take out an amount of salary up to the foreign earned income exclusion cap and (ii) leave the rest in the corp (they'll pay tax on this amount when they take it out as a dividend). 

On the other hand, if they operate through a partnership, then (i) they lose the deferral opportunity described in (ii) above, (ii) they must pay self-employment taxes of 15.3%, and (iii) the FEIE cap is scaled back in relation to the business's profitability.



> 3) Is there other tax that would become due that we haven't considered like self employment tax and can this be offset with the tax we've already paid on dividends and UK corporation tax?


No, there's no other tax. Self-employment tax doesn't apply to a salary paid by a non-U.S. corporation.



> 4) If we've missed the boat on the 8832 or keeping the UK LTD as a corporation for US tax purposes makes the most sense, then is there a way of offsetting some of the tax that would be due on the dividends? (again we've paid UK tax on the dividends and the UK LTD pays corporation tax).
> 
> Thanks for your time.


Like a previous poster mentioned, I am not overly thrilled with taking inconsistent positions for US and UK tax purposes. However, if your wife really did perform services to the corporation that were commensurate with the amount she received, then you have a solid case for treating the amount she received as salary, even though you told the UK that the amounts were dividends. 

Also, note that your wife is a Category 4 filer of the IRS Form 5471--she is treated as owning 100% of the stock of the company through attribution from you. So, she must include a balance sheet and income statement for the corp on the 5471 each year.

This is where the trouble may begin for the salary treatment discussed above. If you drained the corp of cash each year, then it is difficult to treat 100% of the amount paid as a salary. You must deal with the corp as a separate person for US tax purposes, so your wife is really two people as well--a shareholder of the corp and an employee. If you drained the corp each year, then really you are not properly regarding her shareholder role--no real shareholder would send all of the net profits out to the hired help.

And I'm rambling at this point, sorry.  Your situation is complicated enough that hiring a US tax person to help should not be ruled out (the 5471 is not for the faint of heart).


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## Bevdeforges

TaxTalkinGuy said:


> Also, note that your wife is a Category 4 filer of the IRS Form 5471--she is treated as owning 100% of the stock of the company through attribution from you. So, she must include a balance sheet and income statement for the corp on the 5471 each year.
> 
> This is where the trouble may begin for the salary treatment discussed above. If you drained the corp of cash each year, then it is difficult to treat 100% of the amount paid as a salary. You must deal with the corp as a separate person for US tax purposes, so your wife is really two people as well--a shareholder of the corp and an employee. If you drained the corp each year, then really you are not properly regarding her shareholder role--no real shareholder would send all of the net profits out to the hired help.
> 
> And I'm rambling at this point, sorry.  Your situation is complicated enough that hiring a US tax person to help should not be ruled out (the 5471 is not for the faint of heart).


Possibly. Note that the 5471 is "with respect to *certain* foreign corporations" - though the IRS has never been too clear which foreign corporations are "certain" or not. At one point, I did some research and found a listing of the types of business entities the IRS considers to be "foreign corporations" (important because here in France there are many types of business entities, not all of which are considered to be "corporations" in the eyes of the IRS). 
Cheers,
Bev


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## StewartPatton

Bevdeforges said:


> Possibly. Note that the 5471 is "with respect to *certain* foreign corporations" - though the IRS has never been too clear which foreign corporations are "certain" or not. At one point, I did some research and found a listing of the types of business entities the IRS considers to be "foreign corporations" (important because here in France there are many types of business entities, not all of which are considered to be "corporations" in the eyes of the IRS).
> Cheers,
> Bev


Well, a U.S. taxpayer is only required to file a 5471 if they fall into one of the filing categories--this is the source for the "certain," not anything about the foreign entity itself. For example, if a U.S. person acquires 4% of the stock of a foreign corp, then they don't have to file a 5471 (but they would if they acquire 10% or something else happens to make the attribution rules apply so that they own at least 10%).

Also, without an election, any non-U.S. entity where all owners have limited liability is treated as a corporation for U.S. tax purposes. So, anything with SA or LTD after it is a corp for U.S. tax purposes unless an election has been made for it to be disregarded or a partnership.


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