US Eases Failure to File and FBAR penalties

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Mark T Serbinski CA CPA
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US Eases Failure to File and FBAR penalties

Post by Mark T Serbinski CA CPA »

IRS has relaxed their view of U.S. citizens or Dual citizens who live outside the U.S. In FS-2011-13, IRS states that taxpayers who owe no tax due to the application of foreign tax credits or foreign earned income exclusions will not be assessed failure to file or FBAR penalties in cases where IRS has determined that the failure was due to a reasonable cause.

This new pronouncement brings clarity to many Canadian residents who were uncertain of their fate under the 2011 Offshore Voluntary Disclosure Initiative.

This also brings to the forefront the notion that Dual or U.S. citizens who have participated in the 2011 OVDI and who have paid a penalty may have an opportunity to recover the penalty under the new pronouncement.
Mark
tsanaha
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Post by tsanaha »

This is not really a new policy,

"no tax due" no FBAR penalty has been IRS policy for OVDP 2009 and OVDI 2011. Well explained in FAQ.
kal2
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Post by kal2 »

Can 'no tax due' still produce huge penalties? I filed a nil return and now have been reassessed for AMT and several sets of penalties based on not adding the full tentative AMT on top of my regular tax.

The whole thing is completely confusing -- the AMT calculated by the IRS is several thousand dollars less than my regular tax; my regular tax was completely offset by foreign tax credits; I was billed for both the regular tax plus the AMT but only credited for the FTC on the regular tax paid; the uncredited amount of the 'additional taxes/Alternative Minimum Tax' then became the basis for penalties etc.

Plus the reassessment was mailed 21 days ago and only arrived today (the IRS used regular mail to send this to an out-of-country address!).

What is the best way to go about addressing this kind of situation? The AMTFTC completely offsets the AMT, if that were the higher (and thus the collectable) tax. (100% of my income is from outside the US.)
nelsona
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Post by nelsona »

AMT is tax. It can't be considered no tax due. You simply miscalculated your tax, forgot to AMT.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Filo
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Post by Filo »

@kal2: You said, "The AMTFTC completely offsets the AMT, if that were the higher (and thus the collectable) tax."

The AMTFTC (AMT form 1116) is a second version of form 1116 with completely different instructions for filling it out. It is rigged so that, in many cases, the new AMTFTC will come out to be somewhat smaller than the raw alternative minimum tax, with the effect that the raw AMT minus the AMTFTC will give a final nonzero AMT.

The instructions for filling out the AMT version of form 1116 are found in the instructions for form 6251. You will hate the instructions. You have to go through steps 1 through 8 and also decide if you want to take the Simplified Limitation Election (braving the IRS's inscrutable threats for making the wrong choice).

For the AMTFTC, some people benefit from taking the counterintuitive step of not taking the standard deduction on form 1040, but rather filling out schedule A and taking a zero deduction. The only vague hint the IRS gives to this situation is in the instructions for schedule A: "In most cases, your federal income tax will be less if you take the larger of your itemized deductions or your standard deduction."

You may, of course, just choose to pay the IRS's calculation of the AMT rather than slog your way through the quagmire of instructions on form 6251.

I am not giving you any advice, as I have no qualifications whatsoever to do so. I'm just pointing out the availability of instructions on the AMTFTC.
graubart
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Post by graubart »

kal2,

Did you

A. submit form 6251, and

B. submit corresponding AMT 1116s reducing your AMT to 0, then

C. enter 0 for AMT on line 45 of your 1040?

If you haven't done these things you may want to file 1040x amending your filings to include these things. Maybe you have to let the person handling you case at the IRS know.

Would someone please correct me if I am wrong on this.
kal2
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Post by kal2 »

Thank you for all this feedback. I had done the calculation for AMT but did not bother with form 6251 when I saw that my AMT was less than my regular tax. But now I see that simply leaving line 45 blank did not provide enough information, especially because the AMT FTC calculation is so complicated.

Now that I am filling out form 6251, I have some questions about the details of the AMT FTC calculation:

Following the instructions in the instructions to form 6251, step 2, second paragraph, I used the AMT gross income and other amounts. This left me with the same percentages for each type of source that I had when I filled out form 1116 Part I for my regular income tax return. And this also ensured that the amount on the AMT form 1116 line 7, which is copied to line 14, is the same as the amount called for in step 6. This continued to leave my percentages intact -- so 100% of the tentative AMT was offset with the AMT FTC.

I think this is the correct procedure. But I am worried -- it seemed to be a bit too easy.

Did it work out to zero because my 'real' foreign tax was significantly higher than both my regular US tax and the AMT? Or did it work out to zero because I am messing up somewhere?

If there is some tax software that I could use to check the accuracy of what I have done, I would like to know what it is. I did this by hand because I really want to understand the hydraulics of the AMT, and also because I have seen too many reports about AMT problems (and FTC problems) with commercial software. So if anyone knows about a particular program that would be safe to use, I think it is time for me to start using it.

Any feedback on any of these issues would be greatly appreciated. And thank you so much for helping me figure out what my compliance problem was (and is)!
nelsona
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Post by nelsona »

You should NEVER do FTC and AMT by hand. Whatever problems that software may have, wouldn't have been worse that what you got.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
kal2
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Post by kal2 »

I am starting to understand why this is right! What software does cross-border forms like these? Or do I need a purely US program to get at the details of the AMT and FTC, and a purely domestic program for my home country?
nelsona
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Post by nelsona »

There is no software that melds the two. But any us software will do full US return. turbotax or taxcut.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Filo
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Post by Filo »

Turbotax and Taxcut both come in several versions. You need to be sure that the version you buy will handle AMT Form 1116. It would be helpful if someone on this forum could confirm that some specific version does that.

Googling will turn up lots of reviews of TT and TC.

I have seen complaints on the Net that tax software sometimes messes up the required order of the forms when online submission to the IRS is used (particularly as regards 8938 Continuation Sheets), so you might prefer to print out the results and order them correctly and mail them in.

Software won't make all the decisions for you. You still have to decide whether to use the Simplified Limitation Election. Page 11 of the Form 6251 instructions says this: "You must make the election for the first tax year after 1997 for which you claim an AMTFTC. If you do not make the election for that year, you may not make it for a later year. Once made, the election applies to all later tax years and may be revoked only with IRS consent."

If you do use TT or TC to do your taxes including AMT, do us the favor of posting an opinion of how well the software worked, particularly for the AMT Form 1116.
graubart
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Post by graubart »

US Turbotax Basic for 2011 does AMT-1116.
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