# Need some advice for expat US tax questions



## Wanderluster

My husband referred me to this site when I was in the throes of despair over my taxes for the past few years. When I lived in the US, I (easily) filed both my state and federal online, with returns each year. It was all so clear-cut and simple. 

Fast forward to 2011, I move to NZ, work/live there for a few years, have our first child, and have since relocated to Indonesia for my husband's work.

My NZ bank asked if I was an American citizen, ticked a box, and that one question sent me down the proverbial rabbit-hole of expat tax form hell. Little did I know I still had to file!

I'm now trying to backfile from 2011-2014 along with my 2015 (which I'm not sure I even need to file because I did not make any money last year from work and I have very little interest from my bank accounts) and wonder which forms I'm supposed to submit, which ones I ignore, and most of all...whether I'm going to be fined and taxed on my joint accounts with my husband??? We are saving to buy a house and I hold a NZ govt sponsored retirement plan. I am hoping for the best, and filing in good faith. We don't have a lot of money, which is why I've been worried about fines.

I have read through a lot of the posts here, which have made me feel a lot better about my situation and knowing that there are so many expats who have to deal with the same issues. 

My main questions are:

1. Should I back-file (2011-2014) all of the following: 
1040
1040 Schedules A and B
8938
Fincen 114
Form 1116
Form 2225 or 2225EZ 

2. Has anyone been fined or had to pay penalties and what were your experiences?

3. Is it advisable to keep separate accounts from my husband now since the taxes are so complicated? He is a NZ citizen and has NO desire to take on any other form of citizenship. Do I file as a "married filing separately"?

4. I have a daughter who is a NZ citizen by birth, but for whom I can sign up for American citizenship. Is it advisable for me to sign her up for a SSN so I can claim her as a dependent?

5. Do I need to file for 2015 if I had no income, but perhaps some interest (less than US$100) from savings?

I'm sure I'll have a lot more questions as I start preparing my forms, but lots of good content here in the forum so I'm sure a lot I can start looking through older threads.

Thanks in advance.


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## Wanderluster

Whoops, forgot to ask whether I can back-file online for previous years or do I need to print out forms and send snail mail?

Thanks again.


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## Bevdeforges

OK, let's take your questions one at a time (to the extent I can - or refer you to those with more experience in the specifics):



> I'm now trying to backfile from 2011-2014 along with my 2015 (which I'm not sure I even need to file because I did not make any money last year from work and I have very little interest from my bank accounts)


First of all, check to see if you actually NEED to backfile. If you're filing married, filing separately (probably best in this situation), you don't need to file anything if your worldwide income was less than around $3500 each year. (The exact figure changes each year by a little bit and is currently up to about $4000.)



> 1. Should I back-file (2011-2014) all of the following:



1040 - for those years you need to file, probably yes
1040 Schedules A and B - probably no need for Schedule A, Schedule B yes, because you need to answer the question about foreign bank accounts
8938 - not unless the total value of your foreign financial assets is greater than $200,000 (and in this case I would only count "your" half of any joint accounts
Fincen 114 - for those years where your total foreign accounts exceed $10,000
Form 1116 - depends - if you take the FEIE on earned income, you probably won't owe any taxes based solely on that, so no need to bother with form 1116
Form 2225 or 2225EZ - if you were working and have "earned income" it's probably the easiest way to file a quick and dirty return showing $0 owed.

Normally speaking the way it should work is that you file the 1040, 2555 and Schedule B. Assuming your earned income is less than $100,000 and so is completely excluded on the 2555, then your interest income is covered by the personal exemption and standard deduction. That eliminates the need to itemize deductions (i.e. Schedule A) or to claim your daughter as an exemption (which technically also requires you to be able to prove that you provide over half her support).



> 2. Has anyone been fined or had to pay penalties and what were your experiences?


It is very rare for the IRS to come after an overseas resident unless there is lots of unpaid taxes involved. In the "normal" income ranges, a good faith attempt usually is more than adequate.



> 3. Is it advisable to keep separate accounts from my husband now since the taxes are so complicated? He is a NZ citizen and has NO desire to take on any other form of citizenship. Do I file as a "married filing separately"?


Not really. Though you can do so if you wish. You file as married filing separately and only claim your share of any income from joint accounts. (Rules vary by country as to how that is determined, but generally speaking your share would be no more than half.) 



> 4. I have a daughter who is a NZ citizen by birth, but for whom I can sign up for American citizenship. Is it advisable for me to sign her up for a SSN so I can claim her as a dependent?


The way the laws go these days, she either is or isn't a US citizen, whether or not you register her birth with the consulate. It depends on how long you lived in the US after the age of 14. Frankly, at this point, I wouldn't bother getting her a US SSN just to take her exemption if the FEIE excludes all your earned income. Some will advise you to register her simply to take advantage of a child tax credit - but just be aware that filing solely to claim money back from the IRS will raise your profile on the IRS radar. Your choice.



> 5. Do I need to file for 2015 if I had no income, but perhaps some interest (less than US$100) from savings?


You don't need to file for any year in which your worldwide income (in your name only) does not exceed the filing threshold for your filing status. For 2015, the filing threshold for married, filing separately is about $4000.



> whether I can back-file online for previous years or do I need to print out forms and send snail mail?


I think you'll have to snail mail the back filed years (and use the proper forms, available for download from the IRS website). 
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> Some will advise you to register her simply to take advantage of a child tax credit - but just be aware that filing solely to claim money back from the IRS will raise your profile on the IRS radar.


Millions of Americans then "raise their profile" by that standard. The Earned Income Tax Credit, a refundable tax credit, is quite common. So is the Additional Child Tax Credit.

It seems very odd to me that you're simultaneously arguing that the IRS is quite tame (I agree with that) but that U.S. persons should think twice about collecting the refundable tax credits that they are perfectly legally entitled to receive because the IRS might not be so tame. I don't agree with that. Besides, it's no longer possible to collect refundable tax credits (or tax refunds) for tax year 2011 and prior, and the deadline is fast approaching to collect for tax year 2012. There are limits here.


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## Wanderluster

Thank you so much Bevdeforges and BBCwatcher for your responses.

My income was higher than US$4000 between 2011-2013, and I received a some income from the NZ government when I went on maternity leave for 2014, which I do not believe meets the threshold to be counted as income. 

As for my daughter, I am currently in no hurry to obtain an American passport or to sign her up for a SSN. I feel rather ambivalent about obtaining any kind of refund for her from the IRS as she's never lived there. 

Thanks again for the advice. Need to get cracking on these forms now.


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## Bevdeforges

Wanderluster said:


> , and I received a some income from the NZ government when I went on maternity leave for 2014, which I do not believe meets the threshold to be counted as income.


Chances are that any money you received from the NZ government falls under the "public benefits" category which means you wouldn't report it on your US tax forms, anyhow.
Cheers,
Bev


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## Bevdeforges

BBCWatcher said:


> Millions of Americans then "raise their profile" by that standard. The Earned Income Tax Credit, a refundable tax credit, is quite common. So is the Additional Child Tax Credit.
> 
> It seems very odd to me that you're simultaneously arguing that the IRS is quite tame (I agree with that) but that U.S. persons should think twice about collecting the refundable tax credits that they are perfectly legally entitled to receive because the IRS might not be so tame. I don't agree with that. Besides, it's no longer possible to collect refundable tax credits (or tax refunds) for tax year 2011 and prior, and the deadline is fast approaching to collect for tax year 2012. There are limits here.


Hey, cheating on your taxes is something "millions of Americans" do every year, too. It's a personal and private decision. Many folks don't care if they raise their profile with the IRS - others care very much (usually due to "questionable" items they are or aren't reporting). It is simply another factor to take into consideration when deciding what steps to take.
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> Hey, cheating on your taxes is something "millions of Americans" do every year, too.


That's a horrible comparison. There is no valid comparison whatsoever to claiming a tax refund or refundable tax credit you are legally entitled to claim and cheating on your taxes.

The U.S. tax code is explicitly, expressly designed to include negative tax rates. Those who are entitled to those negative tax rates should claim them.

What next? Is anyone going to argue that you shouldn't use your smartphone's mapping functions because they rely on GPS satellites, paid for by the U.S. government and U.S. taxpayers, because you haven't paid any U.S. taxes?


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## Bevdeforges

I didn't say either thing was something anyone should or shouldn't do. Lots of people do it. They just need to consider all the consequences before trying something new on their tax returns. There is no obligation to claim a refund, nor is there any obligation to declare, say, your itemized deductions if you are satisfied with the results obtained with the standard deduction. US taxes involve a series of choices.
Cheers,
Bev


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## byline

Bevdeforges said:


> 1040 - for those years you need to file, probably yes
> 1040 Schedules A and B - probably no need for Schedule A, Schedule B yes, because you need to answer the question about foreign bank accounts
> 8938 - not unless the total value of your foreign financial assets is greater than $200,000 (and in this case I would only count "your" half of any joint accounts
> Fincen 114 - for those years where your total foreign accounts exceed $10,000
> Form 1116 - depends - if you take the FEIE on earned income, you probably won't owe any taxes based solely on that, so no need to bother with form 1116
> Form 2225 or 2225EZ - if you were working and have "earned income" it's probably the easiest way to file a quick and dirty return showing $0 owed.


Good checklist, Bev. Thank you for this!

Something I can't figure out in my own situation: When I was playing catch-up back in 2011, my tax preparer at that time prepared both Form 1116 and Form 2225 for my 2008, 2009 and 2010 tax returns. Then my next tax preparer prepared only Form 1116, no Form 2225, for 2011 and 2012. Then my most recent tax preparer didn't prepare Form 1116 for me in 2013, then turned around and completed four versions of it for 2014.

Every year I show 0 for the Foreign Tax Credit. So I am baffled why, starting with my 2011 tax return, my second tax preparer decided to go with Form 1116 only, rather than going with Form 2225. From what I have read here, I am stuck with filing Form 1116 because of its precedents.


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## Bevdeforges

I think the technical term for that is "CYA" cover your posterior.

What I usually do is run the "easiest" approach (i.e. with the 2555) and if I get the right result (i.e. tax due $0) then I'm done. In my case there are serious complications about trying to allocate French income taxes between what is my husband's portion and what is "my" portion and in the end, my part of the French taxes wouldn't begin to cover what the US wants from me. So once I get to $0 tax due I'm done.
Cheers,
Bev


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## byline

My problem is that when this started, I had no clue which path was "easiest" (and, to be honest, I still don't) so I relied on others to figure that out for me. As I think they would have said back then, information from the IRS was so sparse that they tried to cover all bases. Which, in the end, is confusing for me because I don't know who decided correctly.

In my case, even with Form 1116 filed, I still end up showing 0 taxes owed. I have a feeling that unless my situation changes dramatically, no matter what form I use it's still going to come to 0 U.S. taxes owed. My income is just too meager.


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## BBCWatcher

Bevdeforges said:


> They just need to consider all the consequences before trying something new on their tax returns.


What "consequences"?

You seem to be implying there's some risk in claiming legally entitled refundable tax credits. I'd be very interested to know what risk that is -- and what "risk" millions of Americans who collect their EITCs, ACTCs, and AOTCs are also taking every tax year. For that would be big news if true, something the New York Times or Wall Street Journal might want to know about.

Let's be precise here. There is only one tax refund/refundable tax credit-related risk that I've ever heard about, and it's one the IRS itself tells you about. If you are participating in the IRS's Streamlined Program specifically then the IRS says (closely paraphrasing) it reserves the right to apply somewhat greater scrutiny to tax returns submitted under that program if you're filing for tax refunds or refundable tax credits. Greater scrutiny doesn't mean you'll be denied your refunds or credits. However, if you have some doubts about the truthfulness of your Streamlined Program filings, or if you're intentionally trying to do something stupid like fail to reveal reportable income in those filings, then you should consider the IRS's advice carefully.

Are you thinking of anything else?


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## Bevdeforges

byline said:


> My problem is that when this started, I had no clue which path was "easiest" (and, to be honest, I still don't) so I relied on others to figure that out for me. As I think they would have said back then, information from the IRS was so sparse that they tried to cover all bases. Which, in the end, is confusing for me because I don't know who decided correctly.
> 
> In my case, even with Form 1116 filed, I still end up showing 0 taxes owed. I have a feeling that unless my situation changes dramatically, no matter what form I use it's still going to come to 0 U.S. taxes owed. My income is just too meager.


The "problem" really is that there is no, one, single "correct" way to do anyone's taxes. The US tax system allows for a variety of options, elections, choices and alternatives - even for fairly meager incomes. I think it's almost always assumed that the "goal" is to "get the biggest refund" (or so it seems if you look at the various tax preparation programs) - but there are those who have other goals when it comes to their tax returns. 

What's really unfortunate, however, is how people who "discover" their filing obligations late in life get tied up in knots over the complexities of the system. (And the US tax system really IS complex these days.) At least if you become an expat, you have chosen to move to a new tax jurisdiction, so the matter of learning how to handle the forms and requirements kind of goes with the territory. But having to jump into a foreign tax system when you have no prior experience with it and no particular contacts with the country has got to be much worse.
Cheers,
Bev


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## iota2014

BBCWatcher said:


> If you are participating in the IRS's Streamlined Program specifically then the IRS says (closely paraphrasing) it reserves the right to apply somewhat greater scrutiny to tax returns submitted under that program if you're filing for tax refunds or refundable tax credits.


{giggle}

The idea of the IRS "reserving the right" to do something does make me laugh. 

I think they got dibs on all those rights quite some time ago.


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## Wanderluster

Hi again. I'm doing my first backfile for 2011. 

For the FEIE, I'm definitely under the $92,900 max threshold. Put into plain English, does this mean I don't pay any taxes if I claim this exemption? 

On my 1040, it still calculates that I owe an amount based on Line 44 (Tax). 

I'm confused. Either I am exempt or I'm not. What gives?


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## Bevdeforges

YOU aren't exempt, you can EXCLUDE only your "earned income" on the 2555 form using the Foreign Earned Income Exclusion (assuming you meet the requirements for the year you're filing).

If you are reporting any "passive" income (interest, dividends, investment income, rental income, etc.) that will not be covered by the FEIE and you may owe tax on it. However, if you've paid income taxes in your country of residence (or the country from which you draw the income) you can then claim those as credits against what you may owe the US - using form 1116.

Are you doing your backfiles by hand or are you using a tax preparation software? That might give us a clue as to where the problem lies.
Cheers,
Bev


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## Wanderluster

Im doing this by hand, but thinking there must be a better way?


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## Wanderluster

Btw, my interest from all bank accounts amount to less than $200 and I don't need to file Fbar because for 2011, my aggregate bank balances overseas was less than $10,000. 

My foreign wages were about $25,000, rounded up. I had no work in the USA. 

Something doesn't sound right in my calculations. I can't owe as much as the worksheets say I do. 

Also, I paid a lot of NZ taxes. Should I file Form 1116? Isn't there a tax treaty of some sort between NZ and USA?

At the time, I wasn't married and had no children.


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## BBCWatcher

Yes, you're doing something wrong.

You can pay $12.95 to download the offline edition of TaxAct Deluxe 2011 if you'd like to give that a try. You'll need a Windows PC to run it. It supports both IRS Form 2555 and Form 1116, so you'll be able to see how it all fits together.


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## Wanderluster

Many thanks!


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## Bevdeforges

Just a quick thought here - are you taking your personal exemption and the standard deduction? You can take both of those on whatever is left over after you "exclude" your salary income - and from what you're saying that should wipe out your interest income, leaving you with $0 tax due.
Cheers,
Bev


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## Wanderluster

Looks like I won't be able to download TaxAct since I have a Mac. Any other good download-able suggestions for tax preparation software for previous years?

Bev, I've taken both the exemption and deduction and it's still roughly US$1800 as what I owe.


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## BBCWatcher

It costs a bit more, but H&R Block has a downloadable edition for Mac OS X. Actually two editions: Deluxe and Premium. Deluxe appears to have both Forms 1116 and 2555, so it should be more than enough for you. Premium is useful if, for example, you have rental income from a property.

Amazon.com also offers back editions of H&R Block at Home Deluxe for Mac, and they charge less ($34.99) than if you download the Mac version direct from H&R Block. Here's the direct link to the 2011 edition:

http://www.amazon.com/Block-Home-Deluxe-2011-Download/dp/B0068TJ49A

Click on "Mac Download," and then proceed from there. (Or at least try.) You should also check to make sure you have the latest updates installed for that year and edition.

You can also check eBay for back editions of H&R Block, TurboTax, etc. for Mac. I see several listings, even some listings for whole collections of back years (Windows and Mac). But caution: when you're using a 2011 edition (released in early 2012) of offline tax preparation software, you should be OK if your Mac's operating system is at a circa 2012 version level. So that would be Mac OS X 10.7 (Lion), which was the current Mac OS X back then. If you're running the latest and greatest Mac OS X version (El Capitan at this writing) you _should_ still be OK -- practically everything that can run on Lion can still run on El Capitan -- but there are no guarantees.

Another approach is to try filling out a 2015 tax return using a free online tax preparation software product -- H&R Block's is probably the best choice this year -- to see how that works. Then "backfit" that methodology to 2011 manually, just double checking the instructions at each step.


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## Wanderluster

Cheers, BBCWatcher. I think the H&R Block will do just fine since my taxes are not complicated (I just can't seem to do the calculations correctly by hand).

My husband thinks I'm crazy to go through all of the backfiling for meager wages, but I told him I don't ever want us to be put on the wrong side of the law due to something as simple as taxes.


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## Wanderluster

Wow. What a difference a good tax software prep device can make!

Just finished 2011 and on to 2012 and 2013. It was super simple, and I was even able to self-identify where I made the mistake...I put my wages in the "other" category when I was writing in by hand, and not in the foreign wage category.

Thanks to everyone who has helped with my questions. This is not as bad as I thought it would be.


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## BBCWatcher

For most people the tax preparation software (online or offline, free or fee) is well worth using. I'm a big fan. I'm glad to hear it helped steer you in the right direction. Which tax preparation software did you end up using on/from your Mac? Was there anything you didn't like?


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## Wanderluster

I used H&R Block Deluxe as it seemed the most appropriate for my circumstances. 

It was easy to use, but as with most software of this type, sometimes frustrating when I was toggling back and forth to try to see where I had made my mistake. 

At $60 a download, it's also a bit expensive, but I'd rather pay the bit upfront now as opposed to being fined later.


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## byline

Wanderluster, when you say that you used H&R Block Deluxe, was it a download or did you do it via the H&R Block website? I ended up doing my tax returns myself this year, after running into a roadblock with another free/low-fee online service. I'm OK with doing my own returns, as long as my situation remains as relatively simple as it is. But if that situation ever becomes more complex, then I'd like to be able to turn to a good tax-preparation software package.


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## Wanderluster

Byline, I used the HR Block Deluxe download for my Mac. You need about 40MG of hard drive space to install, and it's pretty straightforward once you install.


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## byline

Thank you, Wanderluster! I may well go that route somewhere down the line.


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## EA-US-HK

Hi, Wanderluster,

It may sound sensible that common sense would prevail but one could easily be misguided because tax compliance is driven by not only complex tax codes and regulations that could sometimes seem contradictory but also by opinions and interpretations from case laws.

1. You should backfile your taxes, although it may not be necessary for you to file your returns for all outstanding years, depending on whether you choose to participate in the Offshore Voluntary Disclosure Program (OVDP) or Streamlined Foreign Offshore Procedures (SFOP) or opt for silent disclosure. There are pros and cons to each and it is crucial that you understand the criteria for participation and the implications. Provided your failure to report was not willful and you meet the prescribed conditions, SFOP may be preferred over silent disclosure (i.e. normal filing) because of the potential penalty waiver and that it would require only the filing of the most recent 3 years' delinquent returns and 6 years' FBAR. You would be well-advised to be diligent in how you manage your backfiling because recent court cases have determined that reckless disregard of a statutory duty and willful blindness could constitute willful violation.

2. Form 2555: It should be noted that the exclusions for foreign earned income and qualified housing expenses are not automatic and election must be made within the statue of limitation stipulated in the regulations. Late election will *not* be permitted where taxes are owed after the exclusions, provided the IRS "discovers" that no election has been made, in the absence of a Private Letter Ruling (PLR). "Discovery" may simply be in the form of a Notice of Deficiency (NOR) and this statue has been upheld in the Tax Court.

3. NZ Government Payment: It is incorrect to presume that foreign government payments are automatically exempt by means of double tax agreements (DTA) with the US, although it may well be the case. In fact, each treaty contains specific articles that govern which treaty party has the primary right to tax a payment, whether preferential rate(s) may apply, and what conditions (including whether the recipient is a tax resident of the treaty country) must be satisfied. There is also a Saving Clause within the US-NZ DTA that allows the US to tax its residents and citizens based on US tax laws notwithstanding any provisions of the DTA to the contrary. Even where NZ has the sole right to tax the payment from the NZ government by means of the DTA, failure to disclose each treaty position would still be subject to a penalty.

Since you have already filed the W-9 with your bank in NZ, they may well have provided your details to the IRS. If a tax notice/audit by the IRS is triggered as a result, your ability to participate in either SFOP or OVPD as well as to make a late election for foreign earned income exclusion may be affect.

It is understandable that your husband does not have any desire to take on any other form of US citizenship. US tax law does, nevertheless, allow for a US tax resident to elect joint filing with a nonresident alien (NRA) spouse, who has no status in the US whatsoever. Depending on a number of considerations, present and future, it may or may not be beneficial for you to make that election, which could reduce your overall tax liability.

The driver of your decision whether to acquire US citizenship for your daughter should not be US tax benefits you may be able to claim, which should be relatively insignificant in the bigger scheme of things. There should also be no contention with you claiming her as a "qualified child" on your US tax return assuming all the conditions are met. Instead, I suppose you are weighing whether the US citizenship may provide additional options to her later on in life or be such as a hindrance, due to tax consequence or otherwise, that it may not be an option worth pursuing. Your daughter's citizenship should, therefore, not be a material consideration for your US tax filing at least at this stage.

Hope this helps <snip>.

Best regards


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## Nononymous

EA-US-HK said:


> The driver of your decision whether to acquire US citizenship for your daughter should not be US tax benefits you may be able to claim, which should be relatively insignificant in the bigger scheme of things.


Minor but important point: If the US citizen parent meets the requirement to pass on citizenship to a child born abroad (having lived 5 years in the US, 2 of which past the age of 14) then that child is a US citizen from the moment of birth. The parent does not *acquire* US citizenship for the child, the parent registers the birth so that the citizenship is recognized and documented. 

However, in practice, a US citizen child born abroad can more easily "conceal" that US citizenship to avoid FATCA and other tax nonsense, and generally live unmolested in the country of their choice, if the birth was never registered. 

Should the child at some point later in life wish to live in the US or otherwise "activate" the citizenship, they can apply for a US passport, provided that they can document their parent having met the criteria etc.


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## EA-US-HK

Thanks for pointing out both the technicality and practical aspect, Nononymous!

Luckily, US tax law does provide relief for these "accidental" citizens who decide to relinquish their citizenship and expatriate before attaining the age of 18½, provided the individual has been:
1) a citizen of another country at birth and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country; and
2) a resident of the United States (as so defined) for not more than 10 taxable years before the date of relinquishment.


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## iota2014

> It may sound sensible that common sense would prevail but one could easily be misguided because [US] tax compliance is driven by not only complex tax codes and regulations that could sometimes seem contradictory but also by opinions and interpretations from case laws.
> [..]
> You would be well-advised to be diligent in how you manage your backfiling because recent [US] court cases have determined that reckless disregard of a statutory duty and willful blindness could constitute willful violation.


Fortunately, even in US courts the IRS has to be able to make the case to show "wilfulness.". There's confusion at the moment as to whether the IRS has to prove wilfulness by the US "preponderance of evidence" standard, or the US "clear and convincing evidence" standard. See http://www.anaford.ch/wp-content/up...idence_standard_in_fbar_case_-_2015-12-18.pdf - interesting case in which the IRS tried to impose a huge wilfulness penalty and the person has brought a case seeking a declaratory judgment as to whether the IRS has to prove its accusation of wilfulness by preponderance of evidence (which the IRS reckon they can do) or by clear and convincing evidence - which they can't.

So even in US Courts, the IRS has to meet a certain standard of proof before handing out these life-destroying penalties. When the US citizen lives elsewhere, and has no US income or assets, they have the protection of their own system of justice, which in many countries would be unlikely to entertain an attempt to take a person's life savings as a "penalty" for failing to know something they couldn't have known,



> 2. Form 2555: It should be noted that the exclusions for foreign earned income and qualified housing expenses are not automatic and election must be made within the statue of limitation stipulated in the regulations. Late election will *not* be permitted where taxes are owed after the exclusions, provided the IRS "discovers" that no election has been made, in the absence of a Private Letter Ruling (PLR). "Discovery" may simply be in the form of a Notice of Deficiency (NOR) and this statue has been upheld in the [US] Tax Court.


Again, it's not so easy for the IRS to get a case tried in front of a US Tax Court if the accused person lives elsewhere and has no US assets/income. It's wrong to suggest that a law-abiding person who lives in another country and had no idea until recently that the US expected them to be living a double life, paying taxes to two different jurisdictions, runs any risk of being taken before a US Tax Court to be punished for not understanding what the US wants them to do.



> 3. NZ Government Payment: It is incorrect to presume that foreign government payments are automatically exempt by means of double tax agreements (DTA) with the US, although it may well be the case. In fact, each treaty contains specific articles that govern which treaty party has the primary right to tax a payment, whether preferential rate(s) may apply, and what conditions (including whether the recipient is a tax resident of the treaty country) must be satisfied. There is also a Saving Clause within the US-NZ DTA that allows the US to tax its residents and citizens based on US tax laws notwithstanding any provisions of the DTA to the contrary.


It's not quite that bad. There are treaty provisions which can't be affected by the US saving clause; and also the US isn't allowed to double tax income which has already been fully taxed by the person's own taxing authority. Tax treaties generally contain an article on "Mutual Agreement", whereby a person can take their case to the Competent Authority of their home country if they consider they're being double taxed.



> Even where NZ has the sole right to tax the payment from the NZ government by means of the DTA, failure to disclose each treaty position would still be subject to a penalty.


Not correct. Income that's exempt under a treaty does not have to be included as Gross Income on the 1040. The treaty position taken may or may not need to be reported - see 301.6114-1(c) for a list of treaty positions for which reporting is waived.



> Since you have already filed the W-9 with your bank in NZ, they may well have provided your details to the IRS. If a tax notice/audit by the IRS is triggered as a result, your ability to participate in either SFOP or OVPD as well as to make a late election for foreign earned income exclusion may be affect.


Fortunately the Model 1 IGAs require banks to notify customers before sending their account information to the local tax authority.



> The driver of your decision whether to acquire US citizenship for your daughter should not be US tax benefits you may be able to claim, which should be relatively insignificant in the bigger scheme of things.


Hear, hear.


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## maz57

iota2014 said:


> Fortunately the Model 1 IGAs require banks to notify customers before sending their account information to the local tax authority.


Hmmmm. Apparently the banks in Canada didn't get the memo. Canadians have been asking their banks if their information has been forwarded to the CRA (Canada Revenue Agency) for transmission to the IRS. The banks say "we can't tell you, ask the CRA". The CRA says "sorry, can't release that information", ask the Revenue Minister. The Revenue Minister says "ask the CRA". Its a merry-go-round and I have heard no reports of anyone being able to find out anything.


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## iota2014

maz57 said:


> Hmmmm. Apparently the banks in Canada didn't get the memo. Canadians have been asking their banks if their information has been forwarded to the CRA (Canada Revenue Agency) for transmission to the IRS. The banks say "we can't tell you, ask the CRA". The CRA says "sorry, can't release that information", ask the Revenue Minister. The Revenue Minister says "ask the CRA". Its a merry-go-round and I have heard no reports of anyone being able to find out anything.


I thought I understood from a discussion elsewhere that it was in the IGA, as it is in the UK IGA, and the banks were wrong in refusing to answer. Apologies if I misunderstood.


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## maz57

That's what I thought, too.


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## EA-US-HK

iota2014 said:


> Fortunately, even in US courts the IRS has to be able to make the case to show "wilfulness.". There's confusion at the moment as to whether the IRS has to prove wilfulness by the US "preponderance of evidence" standard, or the US "clear and convincing evidence" standard. See http://www.anaford.ch/wp-content/up...idence_standard_in_fbar_case_-_2015-12-18.pdf - interesting case in which the IRS tried to impose a huge wilfulness penalty and the person has brought a case seeking a declaratory judgment as to whether the IRS has to prove its accusation of wilfulness by preponderance of evidence (which the IRS reckon they can do) or by clear and convincing evidence - which they can't.
> 
> So even in US Courts, the IRS has to meet a certain standard of proof before handing out these life-destroying penalties. When the US citizen lives elsewhere, and has no US income or assets, they have the protection of their own system of justice, which in many countries would be unlikely to entertain an attempt to take a person's life savings as a "penalty" for failing to know something they couldn't have known,


This is about exercising caution and not about prejudging an outcome.





iota2014 said:


> Again, it's not so easy for the IRS to get a case tried in front of a US Tax Court if the accused person lives elsewhere and has no US assets/income. It's wrong to suggest that a law-abiding person who lives in another country and had no idea until recently that the US expected them to be living a double life, paying taxes to two different jurisdictions, runs any risk of being taken before a US Tax Court to be punished for not understanding what the US wants them to do.


The regulation clearly spells out when late election can be made when there is or is not a balance due. This is not a matter of opinion.





iota2014 said:


> It's not quite that bad. There are treaty provisions which can't be affected by the US saving clause; and also the US isn't allowed to double tax income which has already been fully taxed by the person's own taxing authority. Tax treaties generally contain an article on "Mutual Agreement", whereby a person can take their case to the Competent Authority of their home country if they consider they're being double taxed.


The response is about the danger of "presumption" before all the facts are evaluated. As with most things in tax law, there are often exceptions and recourse, which is not the focus here. It is also unusual that treaty provisions in relation to individual taxes would resort to Competent Authority because application for most related articles are relatively straight forward, perhaps other than Article 4 for Residents.





iota2014 said:


> Not correct. Income that's exempt under a treaty does not have to be included as Gross Income on the 1040. The treaty position taken may or may not need to be reported - see 301.6114-1(c) for a list of treaty positions for which reporting is waived.


It was *never* mentioned in my comment that the income exempt by treaty will have to be included as gross income on 1040. Until we determine which article the income would fall under, *provided* all the conditions for exemption apply, one will not be ascertain whether the exceptions for disclosure will apply.





iota2014 said:


> Fortunately the Model 1 IGAs require banks to notify customers before sending their account information to the local tax authority.


Procedure wise, you may be correct. Nevertheless, NZ already has a FATCA agreement with the US to facilitate the transmission of relevant data to the IRS. It is also customary for financial institutions to inform customers at the time of W-9 completion how the data collected will be used.

The objective of the posting was to provide information that had not yet been discussed and due considerations that should be taken into account. The responses, however, presume the inapplicability of the considerations being raised without first examining the pertinent facts.


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## Wanderluster

Thanks everyone for the advice and information.

Now that I know I have to file, I've gone and back filed for all of those years I needed to file and I've also completed my FBARs. 

To be honest, it's a relief to know I'm caught up. Just hoping this issue is now done and dusted, and I can keep up yearly filings going forward.


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## EA-US-HK

Good to hear you had it all taken care of now, Wanderluster. All the best.


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