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IRS Bulletin: Taxpayers Abroad Must File by June 15; Extensions; FBAR

by | IRS

Issue Number:    IR-2017-105

Inside This Issue

Taxpayers Abroad Must File by June 15; Extensions Available; New Filing Deadline Now Applies to Foreign Account Reports

WASHINGTON — The Internal Revenue Service today reminded taxpayers living and working abroad that they must file their 2016 federal income tax return by Thursday, June 15.

The special June 15 deadline is available to both U.S. citizens and resident aliens abroad, including those with dual citizenship. For those who can’t meet the June 15 deadline, tax-filing extensions are available and they can even be requested electronically. In addition, a new filing deadline now applies to anyone with a foreign bank or financial account required to file an annual report for these accounts, often referred to as an FBAR.

Here is a rundown of key points to keep in mind:

Most People Abroad Need to File An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return. A taxpayer qualifies for the special June 15 filing deadline if both their tax home and abode are outside the United States and Puerto Rico. Those serving in the military outside the U.S. and Puerto Rico also qualify for the extension to June 15.

Be sure to attach a statement indicating which of these two situations applies. Interest, currently at the rate of four percent per year, compounded daily, still applies to any tax payment received after the original April 18 deadline. For details, see the When To File and Pay section in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. Special Income Tax Return Reporting for Foreign Accounts and Assets

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.

Choose Free File

U.S. citizens and resident aliens living abroad can use IRS Free File to prepare and electronically file their returns for free. This means both U.S. citizens and resident aliens living abroad with adjusted gross incomes (AGI) of $64,000 or less can use brand-name software to prepare their returns and then e-file them for free. A limited number of companies provide software that can accommodate foreign addresses.

A second option, Free File Fillable Forms, the electronic version of IRS paper forms, has no income limit and is best suited to people who are comfortable preparing their own tax return.

Both the e-file and Free File electronic filing options are available until Oct. 16, 2017, for anyone filing a 2016 return. Check out the e-file link on IRS.gov for details on the various electronic filing options. Free File is not available to nonresident aliens required to file Form 1040NR.

Automatic Extensions Available Taxpayers abroad who can’t meet the June 15 deadline can still get more time to file, but they need to ask for it. Their extension request must be filed by June 15. Automatic extensions give people until Oct. 16, 2017, to file; however, this does not extend the time to pay tax. An easy way to get the extra time to file is through the Free File link on IRS.gov. In a matter of minutes, anyone, regardless of income, can use this free service to electronically request an extension on Form 4868. To get the extension, taxpayers must estimate their tax liability on this form and pay any amount due.Another option for taxpayers is to pay electronically and get an extension of time to file. IRS will automatically process an extension when taxpayers select Form 4868 and they are making a full or partial federal tax payment using Direct Pay, the Electronic Federal Tax Payment System (EFTPS) or a debit or credit card. There is no need to file a separate Form 4868 when making an electronic payment and indicating it is for an extension. Electronic payment options are available atIRS.gov/payments. International taxpayers who do not have a U.S. bank account should refer to the Foreign Electronic Paymentssection on IRS.gov for more payment options and information.Combat Zone Taxpayers get More Time Without Having to Ask for it Members of the military and eligible support personnel serving in a combat zone have at least 180 days after they leave the combat zone to file their tax returns and pay any taxes due. This includes those serving in Iraq, Afghanistan and other combat zone localities. A complete list of designated combat zone localities can be found in Publication 3, Armed Forces’ Tax Guide, available on IRS.gov. Various circumstances affect the exact length of the extension available to any given taxpayer. Details, including examples illustrating how these extensions are calculated, can be found in the Extensions of Deadlines section in Publication 3.

New Deadline for Reporting Foreign Accounts

Starting this year, the deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is now the same as for a federal income tax return. This means that the 2016 FBAR, Form 114, was normally required to be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 18, 2017. But FinCEN is granting filers missing the original deadline an automatic extension until Oct. 16, 2017 to file the FBAR. Specific extension requests are not required. In the past, the FBAR deadline was June 30 and no extensions were available. In general, the FBAR filing requirement applies to anyone who had an interest in, or signature or other authority, over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2016. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-filing System website. Report in U.S. Dollars Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars.

Both Forms 114 and 8938 require the use of a Dec. 31 exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. Generally, the IRSaccepts any posted exchange rate that is used consistently. For more information on exchange rates, see Foreign Currency and Currency Exchange Rates.

Expatriate Reporting

Taxpayers who relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States during 2016 must file a dual-status alien return, attaching Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with Internal Revenue Service Philadelphia, PA 19255-0049, by the due date of the tax return (including extensions). See the instructions for this form and Notice 2009-85, Guidance for Expatriates Under Section 877A, for further details.

More Information Available Any U.S. taxpayer here or abroad with tax questions can refer to the International Taxpayers landing page and use the online IRS Tax Map and the International Tax Topic Index to get answers. These online tools group IRS forms, publications and web pages by subject and provide users with a single entry point to find tax information. Taxpayers who are looking for return preparers abroad should visit the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.

To help avoid delays with tax refunds, taxpayers living abroad should visit the Helpful Tips for Effectively Receiving a Tax Refund for Taxpayers Living Abroad page.

More information on the tax rules that apply to U.S. citizens and resident aliens living abroad can be found in, Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, available onIRS.gov.

 

IRS Has Relaxed Rules Making the Obamacare Tax Penalty Payment Optional

by | ARTICLES, FED, GOVERNMENT, HEALTHCARE, IRS, LAW, OBAMA, OBAMACARE, TAXES

In response to Donald Trump’s Executive Order last week, the IRS altered its rules about tax returns and Obamacare’s “shared responsibility” penalty.  This is one of the methods of paying for Obamacare, and if collection of the penalty is not being strictly enforced, it will contribute further to the already unstable financial state Obamacare is in.

From Reason.com:

How much difference does a single line on a tax form make? For Obamacare’s individual mandate, the answer might be quite a lot.

Following President Donald Trump’s executive order instructing agencies to provide relief from the health law, the Internal Revenue Service appears to be taking a more lax approach to the coverage requirement.

The health law’s individual mandate requires everyone to either maintain qualifying health coverage or pay a tax penalty, known as a “shared responsibility payment.” The IRS was set to require filers to indicate whether they had maintained coverage in 2016 or paid the penalty by filling out line 61 on their form 1040s. Alternatively, they could claim exemption from the mandate by filing a form 8965.

For most filers, filling out line 61 would be mandatory. The IRS would not accept 1040s unless the coverage box was checked, or the shared responsibility payment noted, or the exemption form included. Otherwise they would be labeled “silent returns” and rejected.

Instead, however, filling out that line will be optional.

Earlier this month, the IRS quietly altered its rules to allow the submission of 1040s with nothing on line 61. The IRS says it still maintains the option to follow up with those who elect not to indicate their coverage status, although it’s not clear what circumstances might trigger a follow up.

But what would have been a mandatory disclosure will instead be voluntary. Silent returns will no longer be automatically rejected. The change is a direct result of the executive order President Donald Trump issued in January directing the government to provide relief from Obamacare to individuals and insurers, within the boundaries of the law.

“The recent executive order directed federal agencies to exercise authority and discretion available to them to reduce potential burden,” the IRS said in a statement to Reason. “Consistent with that, the IRS has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status.”

The tax agency says the change will reduce the health law’s strain on taxpayers. “Processing silent returns means that taxpayer returns are not systemically rejected, allowing them to be processed and minimizing burden on taxpayers, including those expecting a refund,” the IRS statement said.

The change may seem minor. But it makes it clear that following Trump’s executive order, the agency’s trajectory is towards a less strict enforcement process.

Although the new policy leaves Obamacare’s individual mandate on the books, it may make it easier for individuals to go without coverage while avoiding the penalty. Essentially, if not explicitly, it is a weakening of the mandate enforcement mechanism.

“It’s hard to enforce something without information,” says Ryan Ellis, a Senior Fellow at the Conservative Reform Network.

The move has already raised questions about its legality. Federal law gives the administration broad authority to provide exemptions from the mandate. But “it does not allow the administration not to enforce the mandate, which it appears they may be doing here,” says Michael Cannon, health policy director at the libertarian Cato Institute. “Unless the Trump administration maintains the mandate is unconstitutional, the Constitution requires them to enforce it.”

“The mandate can only be weakened by Congress,” says Ellis. “This is a change to how the IRS is choosing to enforce it. They will count on voluntary disclosure of non-coverage rather than asking themselves.”

The IRS notes that taxpayers are still required to pay the mandate penalty, if applicable. “Legislative provisions of the ACA law are still in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe‎,” the agency statement said.

Ellis says the new policy doesn’t fully rise to the level of declining to enforce the law. “If the IRS turns a blind eye to people’s status, that isn’t quite not enforcing it,” he says. “It’s more like the IRS wanting to maintain plausible deniability.”

Tax software companies are already making note of the change. Drake Software, which provides services to tax professionals, recently sent out a notice explaining the change in policy. As of February 3, the notice said, the IRS “will now accept an e-filed return that does not indicate either full-year coverage or an individual shared responsibility payment or does not include an exemption on Form 8965, as required by IRS instructions, Form 1040, line 61.”

The mandate is a key component of Obamacare’s coverage scheme, which is built on what experts sometimes describe as a “three-legged stool.” The law requires health insurers to sell to all comers regardless of health history, and offers subsidies to lower income individuals in order to offset the cost of coverage. In order to prevent people from signing up for coverage only after getting sick, it also requires most individuals to maintain qualifying coverage or face a tax penalty. While defending the health law in court, the Obama administration maintained that the mandate was essential to the structure of the law, designed to make sure that people did not take advantage of its protections.

In a 2012 case challenging the law’s insurance requirement, the Supreme Court ruled that the individual mandate was constitutional as a tax penalty. The IRS is in charge of collecting payments.

Some health policy experts have argued that the mandate was already too weak to be effective, as a result of the many exemptions that are included. A 2012 report by the consulting firm Milliman found that the mandate penalty offered only a modest financial incentives for families making 300-400 percent of the federal poverty line. More recently, health insurers have said that individuals signing up for coverage and then quickly dropping it after major health expenses is a key driver of losses, and rising health insurance premiums.

It’s too early to say whether the change will ultimately make any difference. But given the centrality of the mandate to the law’s coverage scheme and the unsteadiness of the law’s health insurance exchanges, with premiums rising and insurers scaling back participation, it is possible that even a marginal weakening of the mandate could cause further dysfunction. Health insurers have said the mandate is a priority, and asked for it to be strengthened. Weaker enforcement of the mandate could cause insurance carriers to further reduce participation in the exchanges. One major insurer, Humana, said today that it would completely exit Obamacare’s exchanges after this year.

It is also possible that congressional Republicans will make it moot by repealing much of the law, including its individual mandate, which, as a tax, can be taken down with just 51 Senate votes.

Regardless of its direct impact, however, the change may signal that the Trump administration intends to water down enforcement of the health law’s most controversial requirement, even if those steps are seemingly small. The Trump administration may not be tearing Obamacare down entirely, but it appears to be taking steps to weaken the law, however subtly, one line at a time.