# Just learned that spouse US citizenship has tax implications for us in Australia



## rabbits2017

Hi

First time to post. Apologies if this is covered elsewhere.
Apologies also for asking so many questions, but any guidance will be gratefully received.
I am writing this in a state of disbelief, high stress and growing paranoia.

My spouse and I are EU citizens, but long term permanent residents of Australia.
We love life here, both work and are raising little Aussies.
My spouse is a US citizen. I am not.
Spouse left USA as a child, worked there briefly as a student, visited a couple of times but not for a while.
Spouse has requested a new US passport as we want to visit the US on a long anticipated family holiday. Renewal form includes name, address, employer, SSN.
Spouse is unaware of need to file US taxes, something I am only just learning about.
It stuns me.

Immediate worry:
1) What if IRS reach out to us before we reach to them?
2) Can spouse be arrested at entry, exit or during US stay?
3) Can spouse be refused a passport? (I guess we will know soon)
4) Can spouse be refused entry to US?
5) Will passport renewal trigger any of the above?
6) Holiday still some months away. I'd prefer not to break the news until I have researched further, preferably after the holiday, as I don't want to ruin it. Is that a risky strategy to wait so long?


Superannuation
5) Can anyone point me to a digestible discussion of Super? 
6) Would spouse be taxed on growth of super since day 1 or just last three years? (I have read that you can file for the previous three years)
7) Is spouse liable for tax on contributions since day or just last three years?
8) Government and personal contributions are taxed at 15%. Is spouse liable for tax on contributions at US rate-15%?

Next worries
9) On filing, is US govt likely to seek payment of taxes owing since day one, or only tax for last three years ? From what I can tell, Australia has higher income taxes than the US, so possibly no tax owing on salary. How can I tell?
10) We jointly own Australian shares. Income is taxed, but growth is not until shares are sold. Does that differ in US tax law?
11) A couple of years ago we took out a sizeable loan to purchased a managed portfolio. Can anybody point me to a discussion on such investments please?
12) Finally, spouse has US shares held in the US. A W8BEN form has just arrived. I'm guessing it would be suicidal to show US citizenship on this form before sorting out how we get complaint with US tax law? 

Ok, thank you for anyone who has made it this far and any guidance will be most gratefully received.


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## iota2014

No need to panic, but you should tell your wife about it, since she's the USC.

Many USCs living outside the US have been shocked to learn that under US law they're required to file US tax returns every year. The IRS has limited powers of enforcement in other people's countries, fortunately. Your wife can and should take time to get her head round what's required, and decide how best to go about it. Very likely she'll end up owing little or no tax.

Definitely your wife should not lie about her US citizenship on the W-8BEN form. See the bit at the bottom where it mentions "on penalty of perjury"? She'll need to sign a W-9 form, which is for US citizens.


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## rabbits2017

Thanks Iota.
We will not provide false documentation. I could have worded that better. My question there was if spouse fills in the form accurately, with USC details and submits the form without being tax compliant will that create an issue? I think the answer will be yes.

My first concern is that we can travel to the USA and not be arrested before we start our compliance, which is something I want to do after our travels?!

My second concern is superannuation, which is our way of having a comfortable retirement.

Again, thank you for taking the time to answer.


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## iota2014

rabbits2017 said:


> Thanks Iota.
> We will not provide false documentation. I could have worded that better. My question there was if spouse fills in the form accurately, with USC details and submits the form without being tax compliant will that create an issue? I think the answer will be yes.


Your spouse shouldn't sign a W8-BEN because that's a form for non-US-citizens. Your spouse needs to contact the entity that sent the form, and explain about being a USC and only just finding out about the US tax liability. The entity will probably send out a W-9 and perhaps a few other forms



> My first concern is that we can travel to the USA and not be arrested before we start our compliance, which is something I want to do after our travels?!


There's no particular rush about complying though I must admit that if it was me I'd want to get my head round it and work out my plan before travelling to the US with my possibly-USC children. It may be necessary to get them US passports. Biological children of a USC may be "deemed" to have been born with US citizenship, and USCs can't enter the US except on a US passport.



> My second concern is superannuation, which is our way of having a comfortable retirement.


I'll leave that to someone who's familiar with it. Good luck.


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## Bevdeforges

OK, first of all - don't panic. Yeah, your spouse should probably do something about the situation, but there are a number of options and there is no particular urgency to taking any decisions right away.



> Immediate worry:
> 1) What if IRS reach out to us before we reach to them?
> 2) Can spouse be arrested at entry, exit or during US stay?
> 3) Can spouse be refused a passport? (I guess we will know soon)
> 4) Can spouse be refused entry to US?
> 5) Will passport renewal trigger any of the above?
> 6) Holiday still some months away. I'd prefer not to break the news until I have researched further, preferably after the holiday, as I don't want to ruin it. Is that a risky strategy to wait so long?


S/he is in the same situation as thousands, possibly millions of "accidental Americans" living all around the world. There are loads of overt tax evaders and tax cheats who have priority when it comes to the IRS interest and time and efforts. Basically, the IRS is unlikely to even know that your spouse exists, never mind whether or not s/he actually "should" have been filing all these years. S/he will not be stopped at entry or during a US stay. S/he can only be refused a passport if there is a registered judgment against her/him in the amount of $50,000 or more. (Believe me, if there were, s/he would be aware of it.) The passport renewal should not trigger anything in the tax area. Just remember although all US citizens are subject to US taxation, there are many legitimate reasons any particular US citizen may well not have to file a return in any given year.



> Superannuation
> 5) Can anyone point me to a digestible discussion of Super?
> 6) Would spouse be taxed on growth of super since day 1 or just last three years? (I have read that you can file for the previous three years)
> 7) Is spouse liable for tax on contributions since day or just last three years?
> 8) Government and personal contributions are taxed at 15%. Is spouse liable for tax on contributions at US rate-15%?
> 
> Next worries
> 9) On filing, is US govt likely to seek payment of taxes owing since day one, or only tax for last three years ? From what I can tell, Australia has higher income taxes than the US, so possibly no tax owing on salary. How can I tell?
> 10) We jointly own Australian shares. Income is taxed, but growth is not until shares are sold. Does that differ in US tax law?
> 11) A couple of years ago we took out a sizeable loan to purchased a managed portfolio. Can anybody point me to a discussion on such investments please?
> 12) Finally, spouse has been awarded US shares held in the US. A W8BEN form has just arrived. I'm guessing it would be suicidal to show US citizenship on this form before sorting out how we get complaint with US tax law?


I leave you to other to cope with Australian superannuation. It's an area where there is no "authoritative" guidance. But read on for more information.

On your next worries - there is a program called the Streamlined Compliance procedure (or program). Basically, you file current year plus three back years and, assuming you owe little or no tax for that period, you're absolved of liability for all prior years. Of course at that point, you're on the radar and probably ought to keep filing going forward (at least for those years that you have to file). If spouse works, there is the Foreign Earned Income Exclusion - i.e. you don't pay US taxes on up to $100K or so of "earned income" each year. Earned income = salary and salary like earnings. For "unearned income" (i.e. investments and such) there is the Foreign Tax Credit, where you can offset any US tax liability with the income tax paid to a foreign government (i.e. Australia). This is why it's very likely that your spouse owes little or no US income tax.

Owning shares works pretty much the same whether the shares are Australian or American. It only gets really complicated if a US citizen owns 10% or more of "certain foreign corporations." (What they mean by "certain" is a whole other ball of wax.) Owning US shares should pose no problems and it's here where your spouse absolutely should admit to US citizenship, and fill out a W-9 rather than the W8BEN. OK, income from the shares will be reported to the IRS against their SSN - but as a US citizen, they can receive the income without having withholding of taxes (or can specify the level of withholding, in many cases). As a "non-US person" most brokers and agents will (or must) withhold a flat 30% of all income paid. So here it's actually to your spouse's advantage to 'fess up.

So, enjoy your holiday in the US. On the issue of children, just be aware that a US citizen cannot pass on US citizenship to their children unless they lived for a time (I think it's at least 2 years) in the US after the age of 14. Again, there are LOTS of US citizens residing abroad who cannot pass on citizenship to their children.

Net-net your spouse needs to decide what s/he wants to do about the situation, but it's not something they have to do immediately (or even before this vacation). Streamlined compliance is probably the most logical and easiest route. But there are other approaches we can discuss and your spouse can consider.
Cheers,
Bev


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## Nononymous

First off, DON'T PANIC!

Immediate worries:
1) Won't happen.
2) No.
3) No.
4) No.
5) No.
6) I don't want to get into relationship counseling but that strikes me as being a really bad idea. Spouse should be made aware immediately, and be part of all decisions.

Superannuation:
It's Australian and I know nothing about it, being Canadian, but others do. You can find them here or fixthetaxtreaty dot org.

Next worries
9) Run a test return to see if you owe anything. Simple if it's just basic income, more complex with investments.
10) No idea.
11) No idea.
12) Your spouse cannot sign a W8 if they are a US citizen (well they can if they don't mind perjury but in this case, given that there are US shares involved, not a good idea). I have no idea whether signing a W9 will trigger any sort of investigation. Remember there are lots of US citizens with low income who are not required to file tax returns. Just because you own an asset or have a bank balance doesn't mean you owe anything or need to be filing. The IRS knows nothing about your spouse, has no income data, so can't make assumptions about what is likely owed or not owed.

The good news:

There's no great rush to deal with any of this, the vast majority of US citizens overseas are not compliant with US taxes and the IRS will never find them. 

Your spouse will not be denied a US passport, denied entry, or arrested upon arrival. Your tax status will have zero impact on your visit to the US. Submitting a passport application will not cause the IRS to investigate anything. Your travel plans are no reason to make rash decisions about the tax situation.

You can and should explore the option of remaining non-compliant before you take steps to file any US tax forms. That might require getting rid of those US shares and ensuring that you do not invest directly in the US, but otherwise it's often the best strategy. It just depends on (1) are the Australian banks likely to notice or care about a US birthplace - in which case things can be sometimes be done in the name of the non-US spouse - and (2) whether you're likely to care that the US might receive FATCA data if you are identified. The IRS has very limited ability to collect taxes and penalties outside it's own borders, so even if they know a few things about your bank balances, there's nothing much they can do with the information except send out toothless, plaintive letters. (Though be careful here if you are not Australian citizens, because the government may not give you the same level of protection.)

Your spouse might also choose to renounce US citizenship, swiftly, to make this problem go away. It costs US$2350 and while technically one is supposed to file 5 years tax returns upon exit (plus a few other conditions) many don't bother. 

The bad news

You need to investigate whether your children are determined to have inherited US citizenship. From the description you've given, that might be the case (the US parent must have lived 5 years in the US, 2 of which after age 14). If you haven't registered the births with the US, good, that will keep them off the radar. With no US birthplace they will have no tax or banking problems later in life. 

However, this does raise questions about the upcoming trip. You have three options if the kids are US citizens:

1) Spouse obtains US passport, children do not. Probably fine but be prepared for the possibility that US customs will tell you that the children need them too. They won't get into the fine points of citizenship law and won't turn you around. But you might get a lecture. (If the kids aren't US citizens, then you can at least quote the relevant rule.)

2) Spouse does not get US passport, you all go as EU and/or Australian. Likely not a problem, but then as a Canadian I don't need to deal with the ESTA waiver business and am not sure what gets asked on those forms. Spouse should be prepared for possibility that customs will notice the US birthplace and tell them to get a new passport, but it's not that likely.

3) Get US passports for the kids as well. This is "safest" in the short term but may require extra time to document their citizenship, and it puts them on the US radar, though without the US birthplace they should more easily avoid US taxes later in life.

I have a US birthplace and always travel on my Canadian passport, on principle. Only got in minor trouble for it once. My daughter is a US citizen but born in Europe, only travels on a Canadian passport, we've had no issues flying together. But again it might be easier from Canada.

The other bit of bad news is that you have US shares, which is what caused the W8. If you want to remain non-compliant (a wise strategy if you plan on remaining in Australia) it's best if you have no financial ties to the US. So possibly get rid of them.


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## Bevdeforges

Let me just add a couple of things to Nononymous' reply:

I've heard more and more accounts of people with US birthplaces getting pulled aside on entry to the US if they're attempting to enter on another passport. Though it seems to be a hit or miss proposition these days. As long as the spouse has applied to renew their US passport, it's probably best to travel on that to the US. If any question is raised about the kids, as long as they don't have a US birthplace, the correct answer is simply: I left the US as a child (or I left the US when I was 10 years old, or at whatever age). Don't offer any further information - though don't lie if asked something directly. The Immigration people know what the rules are and that fact that a person left the US before the age of 14 should resolve the "issue" of the kids' nationality. 

The question of what to do with the US shares depends quite a bit on a number of factors. But no one is going to track you down based on an honestly filled out W9 form. The W8BEN or W9 form never goes to the IRS. It's only a form the bank or brokerage may use to collect the information they are supposed to have on file. Many banks and brokerages use their own form. What a W9 form (or equivalent) will do is allow the bank or brokerage to generate a 1099 form, which gives the IRS AND the account holder a record of what income is being reported to the IRS. If/when you go for compliance, this is a handy document to have (since they actually tell you which line of the tax forms the various numbers go on).

There are other factors to consider in the matter of whether or how your spouse wants to comply. But remember that the IRS is desperately under staffed and under funded. Unless you are evading large amounts of US income tax, chances are they simply will file your returns away and check off the fact that you have filed. Or, never notice that you didn't file (as long as the 1099s they receive for your US source income don't exceed a level where you "might" owe a significant amount of taxes). 
Cheers,
Bev


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## Nononymous

One other point: 

Be very skeptical and wary of professional advice, from lawyers, accountants and tax preparation firms. A few are scaremongers, pure and simple. But the most well-intentioned still have an institutional bias (or professional obligation) to follow the letter of the law, even when it's not in your best interest. And in some cases the interpretation of IRS rules for overseas taxpayers is pretty vague and fluid, so even professionals don't really know what they're talking about. Also they can be expensive. Sadly, you're best off educating yourself and making your own decisions. 

There are some horror stories out there of individuals panicking and receiving bad advice, particularly around the crap "amnesty" programs five years ago (not streamlined, but the predecessors). A few older folks were absolutely cleaned out, due to idiots urging them into "voluntary" compliance programs with mandatory penalties, plus of course the legal and accounting fees. 

In the long term, you are probably far better off remaining non-compliant, particularly if you think you will earn capital gains in excess of US$500k on the eventual sale of a home.


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## Nononymous

Bevdeforges said:


> Let me just add a couple of things to Nononymous' reply:
> 
> I've heard more and more accounts of people with US birthplaces getting pulled aside on entry to the US if they're attempting to enter on another passport. Though it seems to be a hit or miss proposition these days. As long as the spouse has applied to renew their US passport, it's probably best to travel on that to the US. If any question is raised about the kids, as long as they don't have a US birthplace, the correct answer is simply: I left the US as a child (or I left the US when I was 10 years old, or at whatever age). Don't offer any further information - though don't lie if asked something directly. The Immigration people know what the rules are and that fact that a person left the US before the age of 14 should resolve the "issue" of the kids' nationality.
> 
> The question of what to do with the US shares depends quite a bit on a number of factors. But no one is going to track you down based on an honestly filled out W9 form. The W8BEN or W9 form never goes to the IRS. It's only a form the bank or brokerage may use to collect the information they are supposed to have on file. Many banks and brokerages use their own form. What a W9 form (or equivalent) will do is allow the bank or brokerage to generate a 1099 form, which gives the IRS AND the account holder a record of what income is being reported to the IRS. If/when you go for compliance, this is a handy document to have (since they actually tell you which line of the tax forms the various numbers go on).
> 
> There are other factors to consider in the matter of whether or how your spouse wants to comply. But remember that the IRS is desperately under staffed and under funded. Unless you are evading large amounts of US income tax, chances are they simply will file your returns away and check off the fact that you have filed. Or, never notice that you didn't file (as long as the 1099s they receive for your US source income don't exceed a level where you "might" owe a significant amount of taxes).
> Cheers,
> Bev


Fair point about the passport. I expect that will get worse in the future. That's why even non-compliant old me renewed the thing a few years ago (from a temporary address in a neutral third country, just to be sly) and keep it in a back pocket on those rare occasions when I travel to the US.

As for the shares, probably not a big deal, but I make the general point that if you plan on being non-compliant, it's good practice not to have any US assets. It's not so much that they could generate a 1099, but in the (very unlikely) event that the IRS did somehow decide that you owed it some money, those US assets are the only thing it's able to seize.


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## Moulard

rabbits2017 said:


> Hi
> Superannuation
> 5) Can anyone point me to a digestible discussion of Super?
> 6) Would spouse be taxed on growth of super since day 1 or just last three years? (I have read that you can file for the previous three years)
> 7) Is spouse liable for tax on contributions since day or just last three years?
> 8) Government and personal contributions are taxed at 15%. Is spouse liable for tax on contributions at US rate-15%?


I will try to cover all this off... with a bit of a brain dump... 

For starters, no one knows definitively how the IRS will treat Australian Superannuation. There is basically no guidance for the IRS in the form of regulation, revenue rulings etc apart from a couple private letter rulings that indicate that a superannuation fund is a trust. Those PLR were made for the trusts itself, but the rulings did not venture towards what that meant for the beneficiary of those trusts or the treatment of employer contributions, salary sacrifice or distribution from the trust.

So in many ways, unfortunately you are on your own.

There has been a US Freedom of Information Request that seems to suggest that IRS is leaning towards treating it under Section 402(b) - an unqualified deferred compensation - an employees trust.

So starting with that position ...

Under a 402(b) interpretation, employer contributions would be treated as income at the time the contribution was received by the trust because it is basically vested at that point. Unless you are considered a highly remunerated individual, that is the end of it for the specific tax year. The Highly remunerated rules are geared against you because any Australian is excluded from the calculation.. but If you are earning over ~120K USD happy to share my thoughts on that in a separate response...

Earnings under 402(b) are explicitly excluded from earned income. so you will not be able to to exclude employer contributions on form 2555. Further, because you are not personally liable for the contributions tax, neither can you claim a tax credit for the contributions tax either.

If your super plus any other income is less than your exclusions then you can just treat your super as income and exclude it....

Because of this treatment.. it may actually be worthwhile revoking the foreign earned income exclusion and taking a foreign tax credit instead. For me at least, Australian income tax rates are high enough that there are sufficient tax credits available to be able to offset the fact that no Australian tax is due on employer contributions.

But... (and there is always a but)...

If you have a Self Managed Super Fund, then you are clearly the owner and grantor of the trust, because Australian tax law requires you to be a trustee. The IRS hates foreign trusts, so grantor trusts rules mean that you have to treat both contributions and growth as income... completely defeating the purpose of super...

ok.. that is the perhaps prudent approach.. if you have a bog standard industry type fund and not a master trust or SMSF.. however.....

There are is an argument that suggests that under the Superannuation Administration and Supervision Acts, that in fact it is the ATO which is the owner of the trust. Because under the Supervision Act, if an employer fails to make a contribution, the debt is not owed to the employer but to the ATO.

Personally I find that position compelling, but personally I am not that game. (yet)


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## Moulard

> Immediate worry:
> 1) What if IRS reach out to us before we reach to them?
> 2) Can spouse be arrested at entry, exit or during US stay?
> 3) Can spouse be refused a passport? (I guess we will know soon)
> 4) Can spouse be refused entry to US?
> 5) Will passport renewal trigger any of the above?
> 6) Holiday still some months away. I'd prefer not to break the news until I have researched further, preferably after the holiday, as I don't want to ruin it. Is that a risky strategy to wait so long?


1. chances are that are extremely slim, unless you have millions stashed away if a Swiss bank account. There are lots of reasons a US citizen living abroad would not file... 

2. The IRS cannot stop entry. The INS cannot stop entry. The IRS can flag exit.. but that would only occur if you owe more than $50,000 in tax. Unless there is an existing arrest warrant ... not going to happen.

3. Yes a Passport can be refused. But generally only if the consulate has grounds to believe you are not a US citizen. 

4. Fundamentally, if you are a US citizen, the US cannot prevent your re-entry. To do so would in effect be the US repudiating your US citizenship. You can be fined for entering the US without a US passport, but that is all. TThe can issue other sorts of travel documents thought.

5. I really doubt it. All a foreign passport renewal does, is provide a valid current address. Because at least in Australia, they generally post it out. There is nothing to indicate that is actually shared with the IRS.


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## Bevdeforges

Just a brief addendum to what you've posted here. On number 3, there is apparently new legislation, either pending or possibly passed by now, whereby you can be refused a US passport (or renewal of a US passport) if (as in #2) there is an adjudication against you of at least $50,000 in outstanding taxes due. Like #2, you would certainly know about this - basically you would have had to have been audited and assessed, with a warrant or other civil document on file for the tax delinquency. 
Cheers,
Bev


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## rabbits2017

Thank you Moulard.
Super is standard retail super fund.
Earnings exceed $120k USD.
How would that work?


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## iota2014

rabbits2017 said:


> My spouse and I are EU citizens, but long term permanent residents of Australia.
> We love life here, both work and are raising little Aussies.
> My spouse is a US citizen. I am not.
> Spouse left USA as a child, worked there briefly as a student, visited a couple of times but not for a while.


If your spouse accumulated enough US Social Security credits while working in the US, s/he might be able to claim a small SS retirement pension under the US-Totalization Treaty. (https://www.dss.gov.au/about-the-de...en-australia-and-the-united-states-of-america)

Exploring this possibility will not put your spouse at risk from the IRS. I claimed under the UK Totalization Treaty at the same time I was renouncing - no problem at all and I now receive a nice little pension every month like clockwork. I've more than been repaid the $2350 the State Dept charged me to renounce. 




> Spouse has requested a new US passport as we want to visit the US on a long anticipated family holiday. Renewal form includes name, address, employer, SSN.
> Spouse is unaware of need to file US taxes, something I am only just learning about.
> It stuns me.
> 
> 6) Holiday still some months away. I'd prefer not to break the news until I have researched further, preferably after the holiday, as I don't want to ruin it. Is that a risky strategy to wait so long?


That's not really a strategy is it.

It would be useful if you can find out whether or not the children will be able to get through ESTA (the visa-that-will-not-speak-its-name which the US requires non-USCs from visa-"waiver" countries to use). If yes, then the children should be able to enter with you, on non-US passports, while your spouse goes through the USC line on US passport.

It all depends how many questions the ESTA application process asks about the children's parents. It's all too possible that the questionnaire may ask not only "is the child a USC" but also "is either parent a USC". At which point, if a "yes" answer is received, it may stop the automatic process and send the application down a different path to be handled manually, and that might take some time. (That's just my guess - I've never been through the ESTA process.)

You might want to contact the group at Let's Fix the Australia/US Tax Treaty! – The Australia/US tax treaty needs urgent revision to prevent double taxation

The site is run by US/Aussies who are trying hard to get some clarity on Super and other problems. There may be someone there who's been through ESTA and can tell you whether your children would be able to get through the automated procedure.


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## rabbits2017

Thank you.
Thank you all sincerely for taking the time to answer my many questions.
I am in a calmer state now.
I can see a path ahead, not an easy one, but a way forward nonetheless.

Our kids, btw, do not qualify as US citizens.
Spouse is not self employed, never sold any property, and has straightforward tax arrangements, possibly complicated in US by superannuation, and those US shares, which were allocated as a bonus and may be granted again.

Please forgive my paranoia but may I ask some more questions:
- if, however unlikely it might be, we were contacted by the IRS before taking any action, would they be likely to accept a plea of ignorance or would we receive penalties? The penalties are ruinous looking.
- if on filing we owed some tax (not sure how, but lets say) would IRS demand taxes owed back further than 3 years?
- Could filing result in IRS chasing a sibling, who may be in the same position?


Thank you all again.


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## rabbits2017

Thanks Iota.

The ESTA process just has me and the two kids. They don't qualify for US citizenship. ESTA didn't ask any questions about parentage, from memory, just name, passport details and countries of citizenship.
So all good there.

Spouse would only have spent a couple of months working as a student in the US years ago.

Thanks for pointing out the fix the treaty group. I will investigate.


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## iota2014

> Our kids, btw, do not qualify as US citizens.


Hooray!  



> - if, however unlikely it might be, we were contacted by the IRS before taking any action, would they be likely to accept a plea of ignorance or would we receive penalties? The penalties are ruinous looking.


It's the FBAR penalties that are ruinous. You can protect against that by backfiling six years of FBARs before you travel.



> - if on filing we owed some tax (not sure how, but lets say) would IRS demand taxes owed back further than 3 years?


Very unlikely unless it's a lot of money.



> - Could filing result in IRS chasing a sibling, who may be in the same position?


No. But sibling needs to be told.


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## rabbits2017

Thanks again.

Now I need to understand what an FBAR is. :-(
Would FBAR penalties be applied to someone who genuinely does not have a clue of filing requirements?
Would that mean entering the streamlined program?


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## iota2014

rabbits2017 said:


> Thanks again.
> 
> Now I need to understand what an FBAR is. :-(
> Would that mean entering the streamlined program?


Not necessarily. I didn't (50 years of non-filing  ). But if it's likely your spouse may owe some tax, it might be safest to do it through Streamlined. 

FBAR stands for Foreign Bank Account Reporting. Now officially known as FINCEN114.
(https://www.irs.gov/businesses/smal...t-of-foreign-bank-and-financial-accounts-fbar)

If your spouse has accounts in Australia with aggregated balance > USD10,000 each of the accounts is required to be reported. The reporting is done online. Instructions here:
https://www.fincen.gov/sites/default/files/shared/FBAR Line Item Filing Instructions.pdf

The actual filing of the reports is very easy. It's gathering the information that may be onerous - certainly was for me.


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## rabbits2017

Thank you Nononymus.

Just exploring renunciation:
You are saying that it can be done with out filing?
If we submit a W9 form for US shares, can we later backtrack, renounce and have those shares untouched by IRS?


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## Nononymous

rabbits2017 said:


> Thank you Nononymus.
> 
> Just exploring renunciation:
> You are saying that it can be done with out filing?
> If we submit a W9 form for US shares, can we later backtrack, renounce and have those shares untouched by IRS?


I'm not sure I understand your question there, but I'll try. If you submit a W9 you can still renounce, and still keep your shares, though tax withholding might be treated differently once you lost citizenship. (See below for the question about renouncing without filing.)

Good news that the children are not US citizens. That simplifies matters. If it's ever an issue, you just state that your spouse left the US as a child and didn't meet the requirements to pass it on to the next generation.

The IRS is not going to contact you before, during or after the trip. Period. So put all thoughts of a speedy tax decision to rest, take your time with this. (It takes a few weeks for the paranoia to wind back down, but trust me, you will never hear from the IRS.)

Note also that if your spouse only worked in the US for a few months, they will not be eligible for social security. No need to bother with that.

FBAR is the requirement that you report "foreign" accounts to the US government. If the total balance you hold exceeds US$10k during the year, you need to report basic info about each account. The penalties for failing to do so are high but there's no evidence of them being assessed against ordinary overseas taxpayers coming into compliance - either through streamlined or just regular "quiet disclosure" filing. Normally the fines aren't imposed unless something else is going on, normally US residents hiding money and earnings abroad. Note that all joint accounts need reporting, which sometimes greatly annoys the spouse who is not a US citizen; the same is true for business accounts where the US citizen has signing authority, which sometimes greatly annoys employers. 

So, next steps...

Leave aside the issue of Superannuation until you've decided whether or not compliance makes any sense for you. The two things I'd research now are:

1) How are Australian banks dealing with FATCA? Do they know that your spouse is a US citizen (has he/she been asked) and has any information been reported to the US yet? Furthermore, are the banks likely to restrict services to US citizens? In parts of Europe this has been a problem - US citizens have had difficulty opening or even keeping accounts - but in Canada it's no issue at all, and in fact the enforcement efforts are very weak. I told an investment broker that I was not a US citizen - a lie - and was not challenged or asked where I was born.

2) What protection do you have from US attempts to collect taxes, fines or penalties? I'm not trying to stoke paranoia here, because the odds of them attempting to do so are very, very low. But it's useful to know what your rights are. In Canada, our government will not assist the US in collecting one single cent owed by a Canadian citizen - duals are protected from tax debts, FBAR fines, any other random penalties. But it sounds as though you are not Australian citizens (yet). So I'd want to look into that. There's a good selection of cranky US expats and duals in Australia who can help you.

Onwards...

*Renunciation.* The permanent fix that solves the problem going forward, for US$2350. You are required to file five years of tax returns and six years of FBARs to cleanly leave the US tax system, and there's a special evil exit tax bit that can be costly for those of high net worth. However, the citizenship bit and the taxation bit are separate. You certainly don't need to have your taxes sorted before you renounce (despite what some lawyers will tell you) and you can choose not to bother. If you have no financial ties to the US, then skipping the tax paperwork is a reasonable course of action (either because you wouldn't owe them anything anyway or, even better, if you did). In your case, the continued grant of US stocks may complicate matters. If you renounce, you might want to do it properly, and research the implications with the stocks.

*Compliance.* If you enter Streamlined, it's three years of returns and five years of FBAR (or something close to that). Be aware that the problem with compliance is not so much owing money now (you probably wouldn't, and you very likely would not face any extra penalties) it's the potential for owing money later, or at least running into more and more difficulty filing correctly as your financial life grows more complicated. Here, for example, you'll need to factor in the Superannuation issues that I won't claim to understand. Consider also the business of capital gains on the sale of a primary residence, which the US will tax if it exceeds US$500k per couple. If what I'm hearing about the property market in Australia is any guide, one could easily fall into that trap. In general, while there is a tax treaty to prevent double taxation, and FEIE exemptions on earned income, and foreign tax credits, there are usually enough inconsistencies that a well-off sort of person can easily be hit with a US tax bill - which is stupid. Or at very least substantial accounting fees if they need help preparing returns, and the fear of fines if someone screws up. This at any rate is the argument of a lot of angry expats and duals. I sometimes think it's a bit overblown, but they have a point. On the other hand, if you had ambitions of ever moving to the US, you'd need to be in compliance so that your spouse could sponsor a green card.

*Non-compliance.* My preferred approach if you don't have any ties to the US. (Your stocks might be a concern here, something you'll have to consider.) Advantages: it's easy and cheap. Disadvantages: none as far as I can see, because if the IRS hasn't found me yet, it likely won't, and if it does there's not much it can do anyway. FATCA is not a concern because I lied about my US citizenship and the bank doesn't know, and the Canadian government will protect me anyway. Yes it's possible that five years from now my family will be destitute and I'll be locked up in some American jail, but I doubt it.


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## Bevdeforges

OK - Nononymous has given you a very good overall summary of the situation. Let me just add that there are various degrees of compliance you can take up. It's not an all-or-nothing thing there.

Basically, there are certain income streams the IRS has information about and access to. Most income from "overseas" (i.e. non-US) is pretty much unknown to the IRS, and your primary risk is based on the level of assets you have in the US (bank accounts, brokerage accounts, etc.).

FATCA is primarily concerned with the reporting of foreign (again, to the US) bank accounts by the foreign banks - but don't forget that the banks are reporting year end balances only. FBAR is the self-reporting of the existence of and high balance for the year of your non-US financial accounts. About the only co-relation possible between what the bank reports and what you report is that the high balance you report probably should be higher than or equal to the year end balance they report. However, it's perfectly acceptable for you to report a "good faith estimate" rather than going through a year's worth of bank records to get a precise high balance.

But simply put, there is no danger of the IRS contacting you under the current situation. It's far more likely that, after going through all the hassle of filing (Streamlined or otherwise) you'll owe nothing. Take the time you need to research the US tax system a bit and decide what approach you want to take. There really is no rush.
Cheers,
Bev


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## iota2014

rabbits2017 said:


> If we submit a W9 form for US shares, can we later backtrack, renounce and have those shares untouched by IRS?


US tax will be withheld on any income from the US shares, whether the recipient is a USC or not. Check the US-Australia tax treaty to see what the withholding rate will be a) when your spouse is USC and b) when your spouse is not USC.

Your spouse can probably renounce before any income from the shares is paid, if that's the chosen course and if your spouse moves fast to request a renunciation appointment and if appointments are available. 

Your spouse can't get the withholding rate changed until the Certificate of Loss of Nationality arrives (which may take weeks, even months), but once that arrives, the date of expatriation is the date of swearing the oath, and if any refund is due on the withholding, that can then be claimed.

Your spouse will be visible to the IRS as a USC, once tax is being paid on income from the shares, so it would make sense (if renouncing) to file the five years plus the year of renunciation, plus Form 8854, to make a clean exit.


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## iota2014

> Would FBAR penalties be applied to someone who genuinely does not have a clue of filing requirements?


The IRS has not yet actually tried to collect this penalty from a person who didn't know about it, as far as I've heard. So don't lose sleep over it. It's not something your spouse is likely to have to face. It's more of a threat to scare peopke into complying (which it does).

The "non-wilful" penalty (i.e. for people who never heard of an FBAR and had no idea they were expected to report their perfectly normal bank accounts to the IRS as "foreign") is $10,000 per un-reported account per year; there are some mitigation guidelines.

The "wilful" penalty (for people the IRS can prove did know about FBARs but didn't report) is much worse.


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## Moulard

> 1) How are Australian banks dealing with FATCA? Do they know that your spouse is a US citizen (has he/she been asked) and has any information been reported to the US yet?


The IGA between Australia and the US specifically excludes Super funds from FATCA reporting. So your Super will not have been reported. 

If you bank with a "Limited Scope Financial Institution" then the chance that your accounts have been reported to the ATO and thence to the IRS is small. Fundamentally this category includes "local" banks, and other institutes with only a local client base (they don't seek customers outside Australia, no branches outside Australia etc). So if you bank with a local credit union or the like chances are small. If you bank with one of the Big 4 or their subsidiaries.. chances are significantly higher.

when the IGA was introduced it specifically carved out some reporting requirements for existing accounts. Banks only have to ascertain whether you are a US citizen when the balance exceeds $250,000 on an account set up before the IGA went into effect, or exceeds $50,000 if it was opened after that.



> US citizens have had difficulty opening or even keeping accounts


I have heard of no such stories for bank accounts here in Australia. The same cannot be said for mutual funds.


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## Moulard

rabbits2017 said:


> Super is standard retail super fund.
> Earnings exceed $120k USD.
> How would that work?


So as I said, there is no real guidance from the IRS on how it works. Most of what is published out there by way of interpretation is from the US tax compliance industry that has a vested interest in making it sound as complicated as possible. Further they try to squeeze a round Australian tax code peg into a square US tax code hole.

With that caveat...

Being with a standard retail or industry fund means that chances are high you would not be considered an owner of the trust. In these sort of super funds you are not a trustee, and have very limited control of the management of the funds in the trust. This means you don't have to worry about all of the horrible foreign trust related tax forms. -- 

So we know your spouse's super is a trust, but it is not a grantor trust... 

This is a good thing. 

So.. the next question is where it gets interesting.. and to an extent is up to you to decide... is it an Employee's Trust under Section 402(b) or some other sort of trust. 402(a) deals with exempt trust... Super would be non-exempt and thus fall under 402(b).

When I asked the 120,000 question I should have said... or a 5% owner of the company...

Basically Section 402(b) was written in such a way to penalize employer plans that gave preferential treatment to executives. So the rules basically say.. contributions and distributions are taxable in the year that they are received EXCEPT if the trust is discriminatory - or if you are a highly compensated individual (defined as a 5% owner or paid more that USD $120,000 - the amount gets adjusted every couple years. 

Super is universal, but the IRS rules basically exclude anyone who is not a US person.. so if you are the only US citizen then by definition it is discriminatory in the eyes of the IRS. Stupid. Yes. Further the rules are such that it is the employer can decide if you are. 

My personal take is unless your spouse works for a very small company, they will have no way of knowing if there are any other US citizens employed, nor would the employer have any reason to elect to treat you a specific way under the US tax code. Thus personally I would ignore the highly remunerated individual clause. But I raise it because it is there.. for the purposes of full disclosure.

The 5% ownership is harder to sweet-talk your way out of.

So unless your spouse works for a US company in Australia, and owns less than 5% of the company, if you chose to treat super as non-exempt deferred compensation, then I would just report the employer contributions as income as it is deposited into the fund by the employer.

There are legal arguments that state that because of the way super laws are written in Australia, it is actually the ATO that is the owner of the trust, and that you actually have no interest in it until it is distributed. There are parts of that argument I really find compelling.. but you have to deep dive into the Superannuation (Supervision) Act and probably look into Australian case law...I haven't had time to do that.

The other advantage of a 402(b) approach is that Australian income tax rates are high enough to offset the fact that you will have not paid income tax on the super contributions. In addition this means when it comes to retirement... at best, we will have more clarity in terms of IRS rulings or treaty changes and at worst, a portion of the distribution will have already been reported as income and thus does not need to be assessed.

If your spouse chooses to come into tax compliance, happy to discuss strategies to deal with Superannuation in the most tax effective manner...


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## Nononymous

So, more grist for the mill. 

You can be assured at this point that the IRS knows nothing about your spouse, assuming regular bank accounts aren't vast and being reported under FATCA. Filing a W9 for the US shares may eventually lead to some sort of reporting (a 1099 on income) but that is some time in the future. 

Relax, and decide what to do.

Bev mentions a "partial compliance" approach. I think there's a lot to recommend here, particularly if you're thinking of renouncing. File a basic sort of return with your earned income, and to make it look legit a few FBARs on everything *but* the Super, which you'd want to ignore because the rules are vague, and it's not FATCA-reportable anyway (exactly like RRSPs in Canada). 

You can also take advantage of the fact that one spouse is not a US citizen, assuming of course you trust each other! Want to invest in regular old mutual funds - leave the US spouse out of it. Planning to reap a huge capital gain on the sale of a house - make sure the non-US spouse buys it for a dollar first (I'm assuming that, like Canada, Australia won't impose capital gains tax on the sale of a primary residence). Do what you can to hide assets from the IRS by keeping the US citizen spouse far away from them.


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## iota2014

Question: does the US citizen whose affairs are being discussed actually know that his/her affairs are being discussed in a public forum?


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## rabbits2017

iota2014 said:


> Question: does the US citizen whose affairs are being discussed actually know that his/her affairs are being discussed in a public forum?


No. I was going nuts with this. Had to reach out to someone. 
Hope it doesn't cause problems. I have a high level of paranoia.

Thank you all for your time and advice.


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## iota2014

rabbits2017 said:


> No. I was going nuts with this. Had to reach out to someone.
> Hope it doesn't cause problems. I have a high level of paranoia.
> 
> Thank you all for your time and advice.


I don't get why you're not telling your spouse about this, considering that s/he is the person it most concerns.

I'm out of this thread. I hope your spouse will be able to find a satisfactory solution.


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## celticweb

rabbits2017 said:


> No. I was going nuts with this. Had to reach out to someone.
> Hope it doesn't cause problems. I have a high level of paranoia.
> 
> Thank you all for your time and advice.


Your reaction is normal. seeking advise and gather information so that you can support your spouse with this mess. This is an anonymous forum, we aren't using our real names. and nor is this legal advise. 

For what it's worth, I wish my spouse had given me support like this. I was in similar circumstances to your family, except I was the accidental American and I was the one who learned of the consequences of that. 

My non US citizen spouse was pretty adamant from day one that I broke this news that I had to renounce immediately. I did not renounce immediately but gave myself some time to learn all the ropes and make an informed decision. Eventually I decided to do the streamlined. never heard anything back from the IRS and then did one extra year a few months later to make the 5 years compliance to renounce and exit cleanly. 

The straw that broke the camel's back for me was an impending directorship and partnership in a newly formed UK company and the other shareholders were adamant that they did not want a US citizen abroad due to Fatca reporting. I have never regretted the decision since and everything is back on track in my life.

You have been given some very good advise here, take time to digest it all. and no hurry to make a decision.


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## gairloch

Tax compliance prior to renunciation. 
I have seen people talking about not being compliant before renunciation. I am sure people have done this; I am sure they have never heard 'boo' from the IRS. HOWEVER, you are required to be up-to-date on tax obligations prior to renunciation as per:
Section 4 Line 6  of From 8854 which is filed as part of renunciation.


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## celticweb

gairloch said:


> Tax compliance prior to renunciation.
> I have seen people talking about not being compliant before renunciation. I am sure people have done this; I am sure they have never heard 'boo' from the IRS. HOWEVER, you are required to be up-to-date on tax obligations prior to renunciation as per:
> Section 4 Line 6  of From 8854 which is filed as part of renunciation.


My take on this is that the form 8854 is not filed until the following year, for example, those renouncing this year will not be filing the form 8854 until June 2018 next year unless they apply for a further extension. As long as they are up to date by that time, they can safely certify on the form 8854. they can become up to date before renouncing or after as long as they are up to date by the time the form 8854 is signed. I chose to do it before. but i could easily have done it after.

Those that skip the paperwork entirely and don't file anything prior or after renunciation, rarely file the form 8854 either so they have not certified anything. They renounce and disappear. They have no ties to the US at all and this appears a reasonable course of action in those circumstances. Everyone has to weight up their own risk factor. The IRS is under funded and will use their resources where it matters and I can't see them wasting time chasing people with no ties at all to the USA. They can't even compile an accurate list by quarter of the names of those that expatriated.


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## Nononymous

gairloch said:


> Tax compliance prior to renunciation.
> I have seen people talking about not being compliant before renunciation. I am sure people have done this; I am sure they have never heard 'boo' from the IRS. HOWEVER, you are required to be up-to-date on tax obligations prior to renunciation as per:
> Section 4 Line 6  of From 8854 which is filed as part of renunciation.


Timely reminder - the renunciation process is completely independent of the exit-the-US-tax-system process. One renounces at the consulate and nothing is said about taxes. IF one chooses to exit the tax system, then they need the X years' compliance on tax returns and FBARs plus Form 8854. 

But as noted above, those with no US financial ties are probably fine just renouncing without bothering to deal with the tax paperwork - especially if there's a risk of actually owing money.


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