# Streamlined Foreign Offshore Procedure - proving Non-willfulness



## sceadugenga

I realize that some of the material has already been covered but some of the posts are a little dated with regard to the latest "non-willful" certification procedure.

Last friday I received a call from my local bank branch manager asking for a "serial number" and saying that since I was a US citizen I had to come down to the bank and sign some documents confirming fiscal residence. Having no earthly idea what he was on about. I started looking around the internet and realized that what he is probably talking about is my SSN and signing a compliance statement. After a bit more searching I also made the wonderful discovery that I should have been filing Tax returns all these years and FBARS since 2009. I have been living in my own "private little Idaho" over here in Italy for 23 years having little or no contact with other Americans other than the odd call on the holidays or trips to the consulate to renew my passport. 

My only taxable income is my salary which is under $40,000 a year, I am married to a NRA and we have a joint bank account that has never had a balance of over $35,000. So I don't honestly think I am a big fish for the IRS, however the hyperbole mixed with "sturm und drang" regarding possible fines and penalties has certainly made me nervous to say the least. Not to mention that the definition of "non-willful" seems to lie with the case officer that gets your file.

After a whole weekend of searching and studying various options I've come to the conclusion that my best option is probably the "Streamlined Foreign Offshore Procedures". I may even be able to get the 2014 1040-B in on time. 

At the moment I have a few questions:
1) When filing the FBARS - the procedure states selecting "other" and writing "Streamlined Foreign Offshore Procedures" - Does anyone know if this is sufficient or is there need to elaborate?

2) When filling out the certification to attach to to each return there is a required space for a little essay stating facts and dates in order to prove your "non-willfulness" Anyone have any input as to what an acceptable description would be? How comfortable is the IRS with "I didn't know" as an answer?

3) On the 1040 do I have to attach anything in place of the W-2 to prove total wages?

4) On the 2555-EZ when inserting the dates of bona fide residence is the beginning date when I moved to Italy or 1 Jan of each year's return.

Sorry for being so verbose but the adrenaline is coursing strongly at the moment and I'd like to get started on normalizing my situation.

Thanks,
Joe


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## Bevdeforges

You're hardly the first person to have just discovered all this and you're also far from the last. I think your assessment is correct - at your income level, you are definitely small fry in the IRS scope. Like the advert says, "just do it."



sceadugenga said:


> At the moment I have a few questions:
> 1) When filing the FBARS - the procedure states selecting "other" and writing "Streamlined Foreign Offshore Procedures" - Does anyone know if this is sufficient or is there need to elaborate?


That ought to do it.



> 2) When filling out the certification to attach to to each return there is a required space for a little essay stating facts and dates in order to prove your "non-willfulness" Anyone have any input as to what an acceptable description would be? How comfortable is the IRS with "I didn't know" as an answer?


Frankly, what you've said here is more than adequate: you've been living overseas for 20+ years with limited contact with other American expats. You only just found out about the filing requirements when contacted by your bank regarding the FATCA stuff.



> 3) On the 1040 do I have to attach anything in place of the W-2 to prove total wages?


Nope - they pretty much have to take your word for it.



> 4) On the 2555-EZ when inserting the dates of bona fide residence is the beginning date when I moved to Italy or 1 Jan of each year's return.


If doing the forms manually, just put the year you moved over. If you're using a tax prep program, it may insist on a complete date. Use January 1 of the year you moved, or July 1 if you know for sure you moved sometime "mid-year" - it's not really critical if the year is 20+ years in the past.

Courage! (as we say here in France) Despite all the high flown rhetoric, just file in "good faith" according to the streamlined program instructions (and forever more) and you should be just fine. There are remarkably few audits of us overseas types unless we're in the upper income brackets or hold dodgy looking "investments." Plus, by the end of this year, they are planning to pull back all their overseas IRS employees, so paying to ship someone out of the country for an audit will have to be particularly likely to yield oodles of unpaid taxes.
Cheers,
Bev


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## BBCWatcher

One further note. Given Italy's comparatively high income tax rates you may wish to consider skipping the Foreign Earned Income Exclusion (IRS Form 2555/2555-EZ), relying solely on the Foreign Tax Credit (IRS Form 1116) in order to preserve some potential (or actual) U.S. tax benefits. I don't recommend one path or the other (since I don't know your situation exactly), but I do recommend running simulated tax calculations both ways to determine for yourself which is best. As Bev implied, this task is made much easier if you're using tax preparation software, even the free edition of TaxAct.com, TaxSlayer.com, or similar.

In particular, if you have a documented U.S. citizen child, chances are excellent that the FTC-only path will be much better, notably because at that income level you'll qualify for $1000 in free money per child from the IRS. There's a deadline coming up (June 15, 2015) for claiming that free money for tax year 2011 if you/your child qualified in that particular tax year, so you'd really have to scramble if you qualify (including a Fedex, UPS, or DHL fast courier service to the IRS at this point).


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## sceadugenga

Thanks a lot for the answers!!!!

In my haste to beat the June 15 deadline I overlooked the fact that I gained about $5 of interest on my bank account last year. Is such a silly amount worth declaring and what impact will it have on using the FEIE option since it counts as unearned income. I know it sounds like a silly question but I couldn't find a sufficient answer anywhere in the IRS publication.


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## BBCWatcher

Would that $5 make any difference in the amount of tax you owe? If no -- because you're still well within your personal exemption/standard deduction, for example -- document that fact in your personal files and that's that. If yes, you can file an amended tax return (1040X) to correct the problem.


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## ting33

Will you be filing a 2014 return with the other '3 years' all in one, via print as part of the Streamlined Procedure? 
I'm unsure weather to do this or only the 3, and 2014 vie e-file?

"(1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns..."


Also are you using the US Calendar year Jan 1 - 31 Dec as your accounting dates or your current dates, if they differ?


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## sceadugenga

I'm going to file the printed 2014 return tommorrow with snail mail and the other three over the weekend or on monday. Luckily, Italy also uses the calendar year 01 Jan - 31 Dec so I don't have to adjust anything. I also hope to file all FBARS over the weekend.

cheers!!


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## Bevdeforges

Sounds like you have the situation well in hand. Congratulations on getting the monkey off your back!
Cheers,
Bev


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## sceadugenga

We'll see...:fingerscrossed: "in bocca al lupo" (in the wolf's mouth meaning "break a leg") as we say over here.


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## sceadugenga

Quick question......
When inserting account number for FBAR do you use the actual account number or IBAN / SWIFT numbers?


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## Bevdeforges

I think what they want is the "real" account number (i.e. how the bank refers to the account inhouse) but I doubt they'd have any cause to harass you if you gave them either the IBAN or the SWIFT number. Any one of those serves to identify the account.
Cheers,
Bev


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## sceadugenga

This is becoming more and more like the Jaws movies......"just when you thought it was safe to go back into the water....."

This years' return (2014) is all set to be mailed this afternoon, I submitted my 5 FBARS this morning and thought heck while I'm at it I'll go ahead and knock out the three 1040's in arrears........

I hit another brick wall!!!

Reading the instructions for the FEIE I came across this:

_"Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns.


1) A return filed by the due date (including any extensions).

2) A return amending a timely-filed return. Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid.

3) A return filed within 1 year from the original due date of the return (determined without regard to any extensions).

Filing after the above periods. You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1.911-7(a)(2)(i)(D)" _

If I'm going to participate in the Streamline Procedure I already have to write "Streamlined Foreign Offshore" at the top of each 1040. Does this trump the above clause or do I have to state both. I'm tempted to write both with the logic that more info is better than no info and possible problems. How have the rest of you dealt with this.

Cheers!!!!


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## Bevdeforges

> If I'm going to participate in the Streamline Procedure I already have to write "Streamlined Foreign Offshore" at the top of each 1040. Does this trump the above clause or do I have to state both. I'm tempted to write both with the logic that more info is better than no info and possible problems. How have the rest of you dealt with this.


Write small? In any event, this is kind of why you can't e-file your back-filings in the streamlined compliance program. There's so much "stuff" to write on the top of the form.

Be sure to keep copies of everything you do file. But actually, folks have come through the streamlined process without having written any of the stuff on the top. Or at least not the "pursuant to section..." stuff. 

Just keep repeating to yourself that you are making a good faith effort to file, and they really aren't going to haul you off in irons on tiny "technical" points like this.
Cheers,
Bev


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## sceadugenga

Thanks Bev,

My paranoia stems more from having dealt with the Italian Treasury Dept. over the years, where small and seemingly insignificant "technical" points can carry severe fines you don't even know about (until 10 years later when you receive a whopping fine plus years of accrued interest and penalties on said fine :crazy:.......been there done that!!)


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## Bevdeforges

On their own turf, most tax departments and treasury departments wield a whole lot more power than they do on "foreign soil." The US claims the right to tax its citizens anywhere in the world - but its actual ability to carry out audits and/or to assess and collect penalties is very limited (and will be even more so later this year when all 12 people in the 3 European IRS offices are transferred back home).
Cheers,
Bev


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## sceadugenga

Last question I swear (I hope...)

I'm filling out delinquent 2555's and I'm wondering if they should follow a certain virtual chronology.
I've never filed one before so the first one will technically be that of 2011. For the following years (2012-2013) with regard to the question "enter the last year you filed the form" do I write 2011 and 2012 for the sake of filling out the forms or since I've never filed and I'm sending all three together do I just leave it blank for all three?


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## Bevdeforges

Probably best to fill in 2011, since that is the first year you filed the 2555 form (at least on the 2011 return), and then the immediately prior year for each of the other returns.
Cheers,
Bev


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## sceadugenga

I finally got everything mailed or filed...:whoo: I'd like to thank everyone for your help and support!!!! 

Cheers


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## alepuppy

Hi to everybody,
I have spent last 15 days searching on the web about FACTA and the Streamlined Foreign Offshore Procedures. Finally 3 days ago found this forum and at least I was calming a little down seeing that I am the only persons in this situation. Hope you can help and give me some suggestions:
my husband (US citizen) moved to Italy in '78 and didn't know anything about his obligations with IRS tax returns and the most recent FBAR obligations.
He has been a self employed person since '98 but due to lack of work didn't work in 2014.
Has always paid taxes in Italy but never reported his income to IRS.
Since he quitted his job he is helping a team receiving a non taxable expenses reimbursement.
We have some joined bank account and investments in Italian/Lussemburg Fonds and the amount is about € 400.000.
I was looking for some account specialists and/or layer but for their services they are asking around € 10.000 and with him not working it is really hard.
Was wondering what you think about our situation??? Do you think we will be able to file the procedure by ourselves??? Sceadugenga made it seems pretty easy but I dont think my English is good enough to be able to go through all the IRS instructions and taxes exclusions - deductions ecc.
What are your suggestions???
Alepuppy


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## Bevdeforges

If only your husband has US citizenship, then only he is liable for filing US taxes. It depends a bit on how familiar he was with the process before he came over to Italy, but using some of the tax software available online it shouldn't be too difficult. (Was going to say "using some of the free tax software" but generally the companies charge for the back years. TaxAct only seems to charge $15 for the prior years, though.)

He should take a look at IRS publication 54 and maybe bits and pieces of Publication 17, too. But then go to either the TaxAct or Tax Slayer website and just play around with the free version of the software to see what he thinks. 
Cheers,
Bev


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## alepuppy

Thanks Bev
sorry to be dramatic but he has no previous experience in tax return since he never worked in USA.
I am so worried because I can see only two ways out: me doing it (will absolutely try TAXact or TAX xLAYER) but again don't think I can go through all those IRS instructions; secondly look for a accounts specialist and paid ten of thousend dollars.
Some people I talked to made me even get worrier about the problem having the money invested in Italian Funds and the obbligations to fill so many other forms other than the tax return.
How can I evaluate if its better to look for the foreign earned deductions and/or housing deduction ecc.
I'm feeling hopeless.... don't know how to get this done...


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## Bevdeforges

The nice thing with the tax software is that you can try things one way, print out the result and then go through and do it all another way and see how that turns out. The software has an "interview system" that will kind of talk you through it by just asking you questions. 

But make him help you on this. His command of English is surely better than yours, so he needs to be doing the bulk of the work himself.

The Italian investments may or may not complicate things. It depends a bit on how they are held. That's what could add a few forms to the filing. But first work you way through one of the software packages and come back here with questions as they come up.

They won't come down on you (or rather "him") for simple errors or misunderstandings. What you're looking for is a good-faith attempt at reporting what needs reporting. Should you miss a form or a line or two, and they have reason to know about it, they'll get back to you and usually you can simply correct your error or oversight.
Cheers,
Bev


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## alepuppy

tried Taxact and it helps really alot but still got so many questions??? 
I am debated about writing all my questions or tried resume our financial situations and have it sent.
Read some other threads about taxes but it is so hard to me to understand everything is written in the posts????

Do you bother if I post the whole situation??


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## Bevdeforges

I would be really careful about exposing too much of the specifics of your financial situation. Why not start with a question or two and let's see if we can help you here on the message boards without getting too "personal."
Cheers,
Bev


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## alepuppy

OK here the questions I cannot find answers - will reserve questions about investments to another post:

2012-2013 he worked as golf instructor but closed his position in 2014 due to lack of work.
Do you think that his income as golf instructor is considered self-employment income??? I read on publication 54 that FEIE doesn't apply to self-employment income but instead has always to pay SE taxes???? If FEIE cannot be applied can I deduct the taxes he payed in Italy on that income????
He also had to pay a rent for living in a different city from where I was living and car expenses to move every week between the two houses - can the cost of the rent and the highway been deducted???

2014 he was not working but helping managing a baseball team and received a € 7200 reimbursement.
By the italian law this money is exempt and doesn't need to be declared. Do you think He has to file the tax return for this money??? If yes, will in this case considering that no tax has been paid in Italy (because exempted) FEIE be applicable??? (consider that he didn't present any italian income declaration for this year and I was able to put him on my behalf).

He also got a contract for $ 3000 from a baseball team in USA as private contractor but didn't fill a tax return for it thinking it was under the minimal income.

Thnks and sorry but this forum is the only place I found some help
Alepuppy


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## Bevdeforges

alepuppy said:


> 2012-2013 he worked as golf instructor but closed his position in 2014 due to lack of work.
> Do you think that his income as golf instructor is considered self-employment income??? I read on publication 54 that FEIE doesn't apply to self-employment income but instead has always to pay SE taxes???? If FEIE cannot be applied can I deduct the taxes he payed in Italy on that income????


Self-employment income is normally eligible for the FEIE. Where did you see differently? 

SE tax is actually "social security" (which is American for retirement insurance). However, if there is a social security treaty between the US and Italy (as I think there is), then he shouldn't have to pay "SE tax" as long as he was registered with the Italian social insurance/retirement system for this period and paying into that system.



> He also had to pay a rent for living in a different city from where I was living and car expenses to move every week between the two houses - can the cost of the rent and the highway been deducted???


Quite probably. Though if his revenue before deductions was less than the FEIE limit, he could most likely simply exclude his revenue without having to claim deductions.



> 2014 he was not working but helping managing a baseball team and received a € 7200 reimbursement.
> By the italian law this money is exempt and doesn't need to be declared. Do you think He has to file the tax return for this money??? If yes, will in this case considering that no tax has been paid in Italy (because exempted) FEIE be applicable??? (consider that he didn't present any italian income declaration for this year and I was able to put him on my behalf).


The fact that it was tax exempt in Italy doesn't do him any good. However, as long as he was paid for what he was doing, it should be eligible for the FEIE. (The FEIE is not based on the income having been taxed in your country of residence. Just that is was "earned" - i.e. paid in recognition of his activity.)



> He also got a contract for $ 3000 from a baseball team in USA as private contractor but didn't fill a tax return for it thinking it was under the minimal income.


Should be declared, but again, it would be "earned income" as long as he performed some work for the payment. Includible under the FEIE.
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> However, if there is a social security treaty between the US and Italy (as I think there is), then he shouldn't have to pay "SE tax" as long as he was registered with the Italian social insurance/retirement system for this period and paying into that system.


There is a social security treaty between the United States and Italy. I agree with Bev: as long as he was paying Italian social insurance contributions on his income, he doesn't have to worry about U.S. social security contributions (through the Self-Employment Tax). If he was "in nero" then that's a different problem. 

For the record, he has the _option_ to take the Foreign Earned Income Exclusion (FEIE) on his U.S. tax return but not the _obligation_. He can take the Foreign Tax Credit (FTC) on any/all income that isn't excluded for the Italian income tax he paid. Italy has a generally higher rate of income tax than the U.S. does, so "FTC only" is a fairly common choice among U.S. persons living in Italy. You mentioned he has some untaxed income, though, so he might be better off with the FEIE. You're doing fine (it sounds like), but you can "play" with the tax preparation software to try things a different way later on.

One basic question that would help decide: does he have any dependents living with him at home that he's at least partly financially responsible for, particularly any U.S. citizen children?

Yes, there are a lot of questions -- but there are in Italy, too. Just take it slowly, read each question carefully, and answer as best you can. If you're unsure of an answer set it aside and come back to it. (The tax preparation software/Web site should let you do that, let you save a draft that you can come back to. And sometimes later questions help you understand the earlier questions better.) Italy's tax system is also pretty complicated -- more complicated than the U.S. system in certain ways. One thing that's different is that, if he genuinely owes zero U.S. tax (which seems likely), the penalty for failure to file a U.S. tax return or for filing late is also zero. That's not like Italy.  But it's very reassuring.

I don't think anybody mentioned it yet, but does he hold foreign (non-U.S.) financial accounts that were worth US$10,000 or more in total at any point in time? If so, he would need to file FinCEN Form 114. That's an easy form to file, fortunately -- not as complex as Italy's Form RW, for example. There is a potential penalty for failure to file that form, so I'd recommend he get that done -- the last 6 years (2014, 2013, 2012, 2011, 2010, and 2009). He can choose a truthful reason for why he's filing late -- "I didn't know" is a popular choice -- and, at present, according to others' experiences, the U.S. Treasury isn't assessing late filing penalties for truthful, voluntary, unprompted reporting.


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## alepuppy

Hi 
.
I am still working on the base tax return to apply to the "Streailined foreign offshore procedure" and found out I have to file both form 8938 and form 8921 so I was trying to collect all the information to be able to face 3 years of filling.

I read an old Thread already closed where BBC watcher was explainig about them because I when I found out about these new forms I was ready to fly to the USA to find a tax accountant to help me.

I have a couple of questions about the "mark-to-market gain and loss of PFIC in order to fill form 8921:

BBC Watcher wrote:
Losses can and do offset previously recognized mark-to-market gains: how does this work?
example: I have an investment of $ 50.000 and I make mark-to-market elections of $5000 per 2012. The next year the investment is $ 55.000 and at the end of the year I make mark-to-mark election but the investment goes back to $ 53.000 with means I have a loss of $2000.

How do I use it??

2) Supposing my earned income is fully shielded (through the FEIE), and I have a mark-to-market gain of $5000: BBCWatcher wrote about personal exemption: what is it??? does it mean that other than FEIE I have other exemption??? if Yes what r the amounts??? If the mark-to-market gains are higher of the personal exemption but my earned income is fully shielded do I have to pay taxes on the difference???

thks
Alepuppy


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## Bevdeforges

I'll take a crack at answering the 2nd question, but we'll have to wait for someone with more complex taxes than mine to go for question #1.

Simplest case: You have $90,000 in earned income and $7,000 in investment income. You declare the $90,000 on line 7 (I think it is) and the $7000 wherever and then you fill out form 2555 and exclude your earned income in total. Form 2555 tells you to put $90,000 in parentheses and place it on another line and then subtract it from your total income. So, last line on the page (your "adjusted gross income") turns out to be just the $7,000 in investment income.

Turn over the form 1040 and follow the instructions going down the page. You get to subtract from this $7,000 first your "standard deduction" (assuming you don't want to mess with itemizing deductions) which varies based on your filing status. This, on line 40.) Then, you multiply the number of exemptions you claimed (at least one for yourself - and then if you declared any dependents and/or are filing jointly with your spouse) times the current year's personal exemption (line 42). This may well "wipe out" a modest level of investment income not subject to the FEIE.

And that is, I believe, what BBC was referring to. Even if you're filing married, filing separately (usually the least advantageous filing status) you can count on about $10,000 in combined personal exemption and standard deduction to cover investment or other "unearned" income.
Cheers,
Bev


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## BBCWatcher

And here's how I understand PFIC "mark to markets" to work. Let's suppose you have the following year end PFIC valuations:

Y1: $50,000 (new investment)
Y2: $55,000
Y3: $52,000
Y4: $54,000
Y5: $58,000

As I understand it, your M2M gains would be:

Y1: (first year)
Y2: $5,000
Y3: $0
Y4: $0
Y5: $3,000

In this example the gains are likely to be fully shielded with your personal exemption and standard deduction, as Bev described.

Have you tried letting tax preparation software have a whack at this, at least for one tax year? Even free tax prep software?


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## alepuppy

Hi guys
I will work with the software today if I am able to collect all the numbers I need for the past 6 years.
THe bank is not helping me, and I don't have all the reports they were sending me every 6 months so it is hard to recreate the movements and find the highest amount.

One question: the PFICs we had in the past 6 years are not in an account but they still are financial activities: should I report them on FBAR????? Since I don't have an account number do I have to reports each PFIC on FBAR????? If I report each PFIC with its number it may happen that during one year I had one PFIC $ 50.000 and then sold it to buy another one. When I sold it the money went back to the bank account and some days later out to buy the new PFIC.

Going back to FBAR if I report all 3 financial activity it seems that instead of having $ 50.000 I have $ 150.000 because I report:
PFIC NO 1: highest amount through the year $ 50.000
banck account: highest amount through the year $ 50.000
PFIC NO 2: highest amount through the year $ 50.000

I'll be always be thankful for your help - I have learned so much in the last 3 weeks..
Alepuppy


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## Bevdeforges

As far as anyone can tell, they don't tally up all that you report on your FBARs. It's very common that you have to report over-lapping balances like that - if you had $50,000 that you transferred first to one account and then to another, all within the same year, then yes, you report all three accounts with $50,000 high balances for the year. You're hardly the first to be in that situation.
Cheers,
Bev


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## BBCWatcher

alepuppy said:


> One question: the PFICs we had in the past 6 years are not in an account but they still are financial activities: should I report them on FBAR?????


What were they? I don't mean the specific name, but could you be a little more specific what these PFICs were/are?

Have you reviewed the definition of "Financial Account" in the instructions to FinCEN Form 114?


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## alepuppy

FONDITALIA mutual fonds 
SYMHONIA mutual fonds


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## alepuppy

from FINCEN form 114;

Financial Account. A financial account includes, but is not limited to, a securities, brokerage,
savings, demand, checking, deposit, time deposit, or other account maintained with a financial
institution (or other person performing the services of a financial institution). A financial
account also includes a commodity futures or options account, an insurance policy with a cash
value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in
a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a
regular net asset value determination and regular redemptions).

so I think I have to report them.... :confused2::confused2:


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## BBCWatcher

You do, yes.

You would have an account number attached to those holdings. At the very least it'd be your _codice fiscale_, so if you cannot find anything more precise than that, use that.


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## Zendo

*2555 or 2116 or both*



BBCWatcher said:


> ... you may wish to consider skipping the Foreign Earned Income Exclusion (IRS Form 2555/2555-EZ), relying solely on the Foreign Tax Credit (IRS Form 1116) in order to preserve some potential (or actual) U.S. tax benefits.


Isn't it possible to *combine* the two forms 2555 and 2116 in order to offset some minor amount over the FEIE threshold?


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## BBCWatcher

Zendo said:


> Isn't it possible to *combine* the two forms 2555 and 2116 in order to offset some minor amount over the FEIE threshold?


Forms 2555 and 1116, I assume you meant. Yes, absolutely. If you're fortunate to have income from work over the Foreign Earned Income and Foreign Housing Exclusions then yes, you'll want to file a Form 1116 to account for foreign income tax paid on non-excludable income (assuming you had some foreign income tax -- a few countries don't have any income tax at all).

Let tax preparation software do its "thing," though -- it's a lot easier that way.


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