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Disclaimer: The following is my own experience. IRS compliance is obligatory for USA citizens living abroad, however your own situation might be different from mine. Please consult a USA lawyer if you have questions. IRS Form 5471 Interest in Foreign Corporations - Click Here Background: I lived in Costa Rica between 2004-October 2012 as a non-resident, traveling in and out of the country frequently. I typically spent 6-8 months a year in Costa Rica. In late 2004 I was hired to work for a local business as a marketing consultant. A local lawyer setup a Sociedad Anonima that I owned and operated as an entity to collect my earnings. It was the only way the company could legally hire me as a non-resident foreigner. I paid Impuestos sobre la Renta each year after September 10 in accordance with local law. I paid USA taxes each April as usual. I ceased working for the local company in late 2006. Afterwards I worked alone out of my apartment and used my own corporation to pay applicable local taxes. All taxes and Registro Nacional fees have been paid to present. Why did I pay taxes if I wasn't a resident? My general understanding is that tourists, while technically allowed to own and operate a business, aren't really supposed to live tax free coming and going every 90 days. I wasn't doing this immigration routine, but I was earning money in the country. I thought it would be better to pay Costa Rica something instead of nothing. My name was on their books and I had local bank accounts. IRS Form 5471: All USA citizens who are principal owners, shareholders, etc. of foreign companies must report to the IRS each year. I had no idea this form existed. I did my USA taxes with TurboTax each year. When they asked if I had any "interest in foreign corporations", I naively thought that meant I bought a company's stock in a foreign market, invested a significant amount of money (ie. $250,000 or more) in a local business, or operated a multi-million dollar entrepreneurial enterprise. In reality my humble S.A., which I owned and operated, is (in the opinion of my tax lawyer) required to be reported on Form 5471, now delinquent 6 years. I made a middle-class income and wasn't living a wealthy lifestyle, but the fact that the business was incorporated overseas means that I am liable to the USA government. Form 5471 is best completed by an accountant unless you have time on your hands The IRS estimates 38 hours of time required to learn Form 5471 law, complete the form accurately, and file it appropriately. Remember, this is 38 hours on top of your Foreign Bank Account Forms, Foreign Earned Income Forms, and FATCA form if applicable. It's actually advisable to have an experienced CPA do it for you. Like most people, I can't dedicate an entire workweek to doing paperwork for the government. Delinquent and/or incomplete 5471 Forms are penalized $10,000 USD per year Again, everyone's situation is different, but from casual reading online, the IRS does NOT give people a break from these penalties short of an extreme circumstance. The IRS has never sent me an audit letter, which allows me to come forward after the fact to voluntarily disclose non-compliance. That doesn't mean I get a pass on the $50,000+ fines they can assess. Does a Costa Rica S.A. really need to be reported to the IRS? This depends on your situation and the scope of your business operations. I highly advise consulting a USA tax attorney with knowledge about offshore finance. It is very common for expats in Costa Rica to use corporations to own vehicles, buy real estate, operate a small business, or for basic asset protection from any local law suits. This was the explanation I was given in 2005 when I signed for my S.A. I now get the impression it must be reported if the S.A. is used as a means to produce income or control assets. If you have any doubts, consult someone knowledgeable before you get fined $10,000 a year. I don't think Costa Rica reports who owns what S.A.s to the USA government, but as a USA citizen you must report foreign income, and if such income is derived through a local business using an S.A. you operate, you must also report your ownership in this business. I will followup at a later date once I hear back from the IRS. At this point, I am collecting old bank statements and Costa Rica tax records to complete all the paperwork before submitting it to the USA government.
FYI: A friend just found out that he has to file a FBAR with the IRS next year because his bank account had more than $10,000 in it at one time. He had transferred some money here to buy a car. The penalty for not filing is $10k, and the form must be filed by June 30 the year following the calendar year in which his bank account had more than the $10k in it. I am posting this because I have read that the IRS is being very unforgiving if you fail to file this form, and have a bank account here that has more than $10k in it at any time. IRS link: http://www.irs.gov/B...Accounts-(FBAR) Dana
Hi everyone (especially citizens of the US), If you're enrolled in the STEP program, you got notice of this, but if not, it may be of interest, and I hope it will answer the question as to who has to file the FBAR form and who can skip it. United States Embassy San Jose Message for U.S. Citizens: Internal Revenue Service (IRS) Webinar on Reporting Foreign Bank and Financial Accounts to be Held on June 4, 2014 May 28, 2014 The IRS is hosting an Internal Revenue Service Webinar on Reporting of Foreign Financial Accounts on the Electronic FBAR (Foreign Bank and Financial Accounts Reporting) on Wednesday, June 4, 2014. Information for filers about the filing requirement is available on the IRS website: IRS Reminds Those with Foreign Assets of U.S. Tax Obligations. Date: June 4, 2014 Time: 12:00 pm (MT) Location: Your Office or Home Contact: SB/SE Webinars; Email: email@example.com Event Information: This FREE one-hour broadcast is for: •All Tax Professionals •FBAR filers Topics include: •FBAR legal authorities •FBAR mandatory e-filing overview •Using FinCEN Form 114; and Form 114a •FBAR filing requirements •FBAR filing exceptions •Special filing rules •Recordkeeping •Administrative guidance •Live Q&A session with Subject Matter Experts regards, Gayle
I was surprised that a search for taxes did not lead me to anything about this so I'll ask it. If anyone can point me to a thread that covers this, great. Otherwise, any feedback I can get here would be great. Before I go investing in property I'd like to have some idea of how this works with the IRS, and I'm really ignorant of tax stuff re selling property. I understand that when you sell a property in Costa Rica you pay some fees and taxes to Costa Rica. But what about the IRS? What kind of tax burden does the IRS it you with? Is there a certain amount you can get as income from a property sale without owing taxes on it? Or do you pay IRS taxes no matter how much the sale is? (i.e.; I thought I heard something about the first $50k or so of income from a sale was not taxable; but I may have been dreaming! ;-D ) Is the IRS tax the same on raw land as it would be on a home? (in other words is income income or is income from a house sale different from income from a land sale, in the IRS's view?) I don't expect legal advice or tax advice here; I'm just looking for a general ball park idea and perhaps a link or two to more info on this, or anecdotal stuff like "I sold some land for $xx,xxx and paid $xxxx in taxes"... Just how BAD is the IRS hit on real estate profit from CR? So let's say I buy a property and sell it 10 years later for 5 times what it's worth. (I'm not saying that's practical to do, I'm just using this as an easy mathematical concept to deal with.) So let's say I paid $50k for the property and sell it for $250k. About how much of that $200k profit would the IRS want to take from me? I'm trying to get a feel for what my obligation is to the IRS would be for a sale of this type. And how much paperwork would I have to submit to the IRS? Would they need to know who sold it to me and when? How much I paid? etc. Or would they only need to know how much money I put in the bank from the sale, the title info and buyer? And I guess if you sell a property in CR you HAVE to have a bank account in CR, right? You can't conduct the whole thing using US banks, or US / Canada? What if the buyer was from, say, Canada or Mexico, for example? Would it matter where the buyer was from, from the IRS's standpoint? Or do they only care about the income the U.S. citizen made from it? Mostly I just want to know how much of a tax burden it is to sell a property for a profit in CR? And how complicated the IRS reporting is.