Non-willful FBAR violations: don’t worry about it

I recently talked to an American who was living and Spain and freaking out about the fact that he had never filed an FBAR form (any US person is required to file it every year if you have more than $10,000 in total financial assets outside the US).

If you read the law, you could think that you are in deep shit… up to $10,000 fines per account per year, even if you never knew you needed to file. In order to take advantage of the overly honest, the IRS launched a “voluntary disclosure” program, which lets you come clean, pay your fine, and promise not do it again.

Should you join the voluntary disclosure program? Personally, I’d avoid it. Firstly, if it was unintentional, the FBAR penalties cannot be collected via the IRS (from Jack Townsends blog):

I also think there is an important distinction to be made between proving that a taxpayer willfully failed to report income and that a taxpayer willfully failed to file an FBAR. The FBAR was a form few practitioners heard of pre-UBS. To prove a taxpayer’s knowledge of the FBAR and his obligation to file the form will not be an easy task for the government as few accountants told their clients of their FBAR obligation. Additionally, the FBAR is a penalty that arises out of Title 31 of the United States Code and not Title 26 (Internal Revenue Code). As a Title 31 penalty, the IRS can assess the penalty but it cannot collect it under the Internal Revenue Code with lies and levies and other IRS collection tools. Instead, the IRS is treated just like any other creditor. To collect the FBAR penalty, the IRS must make a referral to DOJ’s Tax Division, which then must seek a judgment in US district court against the taxpayer. Once in court, the taxpayer may assert a lack of willfulness as a defense and have his day in court.

So basically, if you are living in Spain, the IRS is severely restricted in what it can do to go after you, especially if you have no assets in the US. Since this is not a “tax”, the US cannot ask the Spanish government to collect this tax on the basis of the US/Spain tax treaty. (but do remember that if you are an American living overseas, the Washington DC District Court has jurisdiction over you)

This is one of the reasons that the IRS is moving away from FBAR towards the “Son of FBAR”, which is part of your tax return, and thus any fines and penalties are much more difficult to avoid.

Of course, now that you know about FBAR, you have to start filing your statements. Sorry about that.

Spain’s new half-assed wealth tax

So the government is going to re-introduce the wealth tax on “fortunes” larger than about 700,000 euros. Of course, since this is just electioneering, the really wealthy are excluded from this tax, given that they have a vast array of loopholes they can use to avoid this tax. Including:

• Corporate ownership. If you own more than 5% of a company and are on the board of directors or CEO, you don’t need to pay taxes on these shares.
• SICAV: These are effectively mutual funds that are require a 2.1 million initial investment, and are subsequently only taxed at 1%. The rules around SICAVs are very loosely enforced and the Tax Office cannot even investigate possible fraud without going through the Spanish equivalent of the SEC.
• Palaces and other historical buildings are exempt (I’m sure the Duchess of Alba will be happy)

So basically, this is effectively the really rich making sure that the aspirational rich don’t make it up the next rung. But even the aspirational rich can use the above methods to avoid these taxes, so who is left? My guess is that the only people who will pay are:

1. People just over the 700,000 boundary where it’s not worth it to try to avoid it
2. People that are real estate rich, but money poor (eg old people who happen own a house that is now in a very desirable neighborhood)

Excess foreign tax credits and 83b election

If you are American pay and more taxes in Spain than you would owe in the US, you are most likely collecting unusable foreign tax credits, and in the event that you move back to the US, it would be unlikely that these would come to much use.

So what you’d really like would be some way to shift taxation of income from the future to now, so that you can apply your US foreign tax credits now. At the same time, you’d like to do it in such a way that Spain doesn’t tax you at a higher rate as well.

If you are lucky enough to work for a company that grants restricted employee stock awards, there is a mechanism available for you.

Normally, you are given the rights to the stock, but your ability to actually sell it vests over some period of time (usually four or five years). You usually pay taxes on the stock as it vests (although in Spain you can reduce your income somewhat by not selling part of it for three years).

Section 83b of the US tax code lets you pay taxes on a portion of the restricted stock you receive NOW, as opposed to when it vests. This means that you can choose an amount is taxed to match the excess foreign tax credits you have, so that at the end of the year, your Spanish and US tax liabilities are exactly the same (and you still owe 0 to the US).

If you do end up moving back to the US and continue to work for your company, you now are able to vest that part of the stock tax free, so in the end, you can recuperate most of the extra taxes you paid while you were in the US.

A word of caution: In the case you quit or get fired, you don’t get a refund, but it’s unlikely that you’d be able to use the excess foreign tax credits for much, so it’s not that big of a loss.

Flag burning and insulting the king still illegal in Spain

I was surprised to see that burning flags and/or pictures of the king is still a serious offense in Spain, punishable by up to two years in prison.

It seems like there’s an obvious constitutional argument to be made that burning the flag could be considered political speech (given the fact that the Constitutional Court ruled in 2007 that even Holocaust denial is protected speech).

The problem in Spain is that unlike the US, only the Constitutional Court can rule on the constitutionality of a law (whereas in the US any court can strike down a law as unconstitutional, but this can be appealed up the the Supreme Court), so it takes years for any case to be appealed on constitutional issues.

So in Spain, you’d first get convicted (even if the judge thinks the law is unconstitutional, he can’t do anything about it), then spend two years in prison, then five years later the Constitutional Court would find that the law is unconstitutional.

Son of FBAR (Form 8938)

The IRS has really twisted itself into a knot with the new 8938 form, in which you will be required to report extremely detailed information about every financial asset that you own overseas (if you have more than $50,000 in financial assets in total).

According to the bill passed by Congress, you will be required to provide this information as of the 2010 tax year. Unfortunately, the IRS has been slow in creating this form and it is still in the draft stage.

How does the IRS solve the problem that it has created by not providing the form in time? Why, but dumping the problem on you.

In June 2011, the IRS released this wonderful bulletin, which said that it was suspending the requirements to file the form 8938 due to the fact that this form does not yet exist. However, it added this wonderful suffix:

Further, after the release of Form 8938 or the revised Form 8621, individuals and PFIC shareholders for which the filing of Form 8938 or 8621 is suspended by Notice 2011-55 for a tax year will have to attach Form 8938, Form 8621, or both, if required, for the suspended tax year to the next income tax or information return required to be filed with the IRS.

Notice 2011-55 clarifies that the statute of limitation on assessment of tax with respect to periods for which reporting is required under sections 6038D or 1298(f) will not expire before three years after the date on which the IRS receives Forms 8938 or 8621 for the tax year. However, a Form 8938 or 8621 filed for a suspended tax year with a timely filed income tax or information return (taking into account extensions) as required by Notice 2011-55 will be treated as having been filed on the date that the income tax or information return for the suspended tax year was filed.

What does this mean in English? What they want you to do is file the 2010 form with your 2011 return (or whatever year after they finish their form). If you don’t, then they claim they can say that you filed the form 8939 late (and assess penalties, etc), even though it did not exist at the time when you were supposed to file your return.

This hurts us more than it hurts you

The German economics minister must be living on another planet if he thinks anyone is going to go for his plan:

We also need the possibility of an orderly bankruptcy States. Tellingly, the term "Resolvenz" is. Because the goal of this process is to restore the functioning of the State concerned, possibly by the temporary limitation of sovereignty. The Resolvenzverfahren should be conducted by an independent body, such as a continuously developed stabilization mechanism (ESM), the act would then be comparable with the International Monetary Fund.

Roesler goes on to say that there should be “no more taboos” in the debate. Perhaps one of the broken taboos could be a discussion about whether countries in Europe really want to be run by the Germans, and whether that question wasn’t answered well enough fifty years ago.

I’m not being entirely facetious, since the bottom line is that sovereignty always comes down to a question of force. If you don’t pay your taxes long enough, eventually someone with a gun will come and take your stuff away from you. It reminds me of a discussion I had with my eight year old the other day:

Kid: Why can’t we park here?
Me: Because we’d get a parking ticket?
Kid: What if you don’t pay the parking ticket?
Me: They’d go to court and demand that I pay
Kid: What if you still don’t pay?
Me: Eventually they would confiscate my car and not give it back until I pay.
Kid: What if you park the car inside our garage and don’t let anyone in?
Me: Eventually the police would come and take it
Kid: What if we don’t let them in?
Me: Well, they have the guns…
Kid: I hate the police.

And that’s how it goes…

Update: In case you think I’m exaggerating:

Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets.

Why Jürgen Stark resigning from the ECB might be good news for Spain

Traditionally, France and Germany have run the ECB for their own benefit, and as long as there wasn’t a total consensus on the other side, they would get their own way. However, numerically Germany, Austria, France, Holland and Luxemburg (and hard currency advocate Finland) only have 10 out of 21 votes. Thus, if everyone else (currently Ireland, Spain, Italy, Cyprus, Portugal, Slovenia and Slovakia) agrees… well, Germany could be in for a rude awakening…

My interpretation is that the ECB is about to start doing things that Stark finds absolutely unacceptable, which means that the ECB is likely to continue to support the periphery debt, probably even more aggressively. ie Good news for Spain.

Interestingly enough, his replacement is a banker who was on the board of one of the larger German bank failures in 2008. If I had a to take a guess, given the choice between forcing a massive recapitalization of German banks (wiping out his banker friends) and having the ECB keep the PIIGS afloat, he would choose the latter.

Hard core third grade

We just had the “meet the teacher” for third grade, and is our son ever into a surprise this year… if there is a sound of jaws dropping, it was definitely happening when the teacher said that the kids are going to have about an hour of homework every day.

Then the teacher said that she would be collecting the summer homework book that the kids should have completed. Err…. oops. Now our son was been working like crazy to do nine weeks of work in three days, which we thought would be good practice for the new homework regime. At least he doesn’t seem to mind that much, which might be a good sign.

Luckily, we were very impressed by the teacher, who was super-organized, very friendly, but very no-bullshit as well.

I guess this is the beginning of the academic treadmill…

(one sad/funny thing at the meeting was that the *only* thing that got cheers and applause was the improvements they are making to the soccer field… the new academic programs, etc… crickets)