Dual Citizen’s Taxes

The United States practices worldwide taxation which means if you are a taxpaying citizen or resident alien living outside the US, you must declare your income both to your host country as well as to the IRS for the year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction. In addition to filing your federal income tax returns you are also obligated to file the Reports of Foreign Bank and Financial Accounts (FBARs). Failure to file either or both these forms will result in heavy penalties. However, the IRS says you will only be required to file your taxes up to 6 years back.

Under the Inland Revenue Code section 6651, the penalty is 5% of the amount of tax required to be shown on the return unless you can convince the IRS that the failure is due to reasonable cause and not willful neglect. If the failure continues for more than one month, an additional penalty of 5% may be imposed for each month or part thereof during which the failure continues. The total failure to file penalty cannot exceed 25%. However, if there is no penalty then no tax will be due.

On the other hand, if you did file your returns but failed to pay the amount of taxes due the penalty starts on the due date of the return (determined without regard to any extension of time for filing the return) and is 0.5% of the amount of tax shown on the return. If the non-payment continues for more than one month, an additional 0.5% penalty may be imposed for each additional month or part thereof as long as any part of the taxes remains outstanding. The total failure to pay penalty cannot exceed 25%. Again, no penalty is imposed if you do not owe any taxes.

If you are guilty of both non-filing and non-payment, the failure to file penalty is reduced by the amount of the failure to pay penalty for any month in which both transgressions are committed.

If you have to prove that there was reasonable cause for non-compliance, you have to show the IRS that you exercised “ordinary business care and prudence” in meeting your tax obligations but nevertheless failed to meet them. Generally, ordinary business care and prudence will depend on your reasons given for not meeting your tax obligations, your track record of tax compliance, how long it was between your failure to meet your tax obligations and your subsequent compliance and whatever circumstances were out of your control.

One more thing…failure to file FBARs carry a separate penalty.

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Form 433A by the IRS

When you owe money to the IRS, you have various means to repay your debt. But in order for the payments to be made smoothly and accurately, you have to tell the IRS what you really owe. This is done through Form 433A Collection Information Statement for Individuals. The information you provide in Form 433A will be the basis for the IRS to decide on their repayment agreement with you, whether it be accepting your offer in compromise, declaring your case uncollectible or formalizing an installment arrangement.

For example, Form 433A is a standard form to fill if you are applying to make an offer in compromise. With the information on this form the IRS will perform its research and due-diligence into your case and decide whether to accept your offer.
Here is the information that is required of you in Form 433A:

In Section 1 of the form, you need to disclose your personal information. In Section 2, provide proof of earnings and deductions for the past 3 months from each employer. This may be in the form of pay stubs or earnings statements.

For Section 3, furnish proof of pension/Social Security/other income for the past 3 months for each payer and include and statements showing deductions. Section 4 is all about how much you make in terms of your investment income. So you should show copies of all your bank accounts (savings and checking), investment accounts such as stocks and bonds and life insurance policies. If you have used your insurance policies as collateral you should furnish details of your borrowing.

Section 5 is for you to provide any other details not explained fully in Sections 1 to 4. Section 6 requires you to declare your assets and liabilities. Assuming you have a vehicle that is under financing, you should include your current statement from your lender with your monthly vehicle payment amount and current balance of the loan for each vehicle purchased or leased. Likewise, include your current statement from your lender with your monthly house or other real estate payment amount and current balance for each piece of real estate owned.

Section 7 is about accounts receivables whereas the last section, Section 8 is an analysis of your monthly income and expenses.

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The Adoption Tax credit has been extended for another year. But unfortunately, the woes of parents claiming the credit continue as well. For tax year 2012, the adoption tax credit is non- refundable to a maximum amount of $12,650 per child.

According to a report by the National Taxpayer Advocate, a vast majority of families filing returns were subject to additional review to determine if an audit was necessary, while nearly 70% of all cases claiming the adoption tax credit during last year’s filing season were selected for audit. However, more than 55% of those audited ended with no change in tax owed or refund due.

The North American Council on Adoptable Children said a few different problems were brought to their attention:

• The IRS requested documentation of the adoption in certain cases despite the fact that the parents had already sent the correct documentation with their return.

• The current IRS documentation notice says that everyone has to provide documentation of expenses.

The fact is you do not have to submit any supporting adoption tax credit documents to the IRS. However after filing your return, you may be asked to verify any adoption expenses you claimed. Therefore, you should make sure to keep all your adoption documents.

If the IRS contacted you regarding your 2010 or 2011 adoption tax credit, check the audit notice. Review the audit notice and compare it with the information on your return. The audit notice will explain what you should do, such as provide certain documentation to resolve the issue. If a refund is due to you, you will still receive that part of your refund while the audit is being conducted. Mail or fax the requested documents and information, along with the bottom tear-off portion of the notice, to the IRS address or fax number shown on the notice.

If all your documents are in order the IRS will inform you of the status of your adoption credit claim and release any refund due to you. But you need to give the IRS least six weeks for a response.


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When you fail to pay your taxes, the IRS has many ways to collect the money from you. One of the weapons of mass collection in the IRS arsenal is wage levy. So what is wage levy? A levy is a seizure of any asset (such as your wages) to satisfy a tax debt. But levies are not imposed without warning. The IRS must put in place certain measures first before levying your wages. Three things must tale place first:

• The IRS sends a Notice and Demand for Payment

• You fail to pay the tax

• The IRS sends you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice). Only after 30 days after the final notice is sent will the IRS impose the levy. The final may be delivered in person, left at your home or usual place of work/business, or sent to your last known address by certified or registered mail, return receipt requested. If a levy is imposed on your state tax refund, you may receive a Notice of Levy on Your State Tax Refund, Notice of Your Right to Hearing after the levy.

Levying your wages means the IRS orders your employer to withhold a certain portion of your wages to pay for your outstanding tax debt. This also includes self-employment income, your pension or Social Security income. The amount of the levy depends on your Filing Status and family size and such an action by the Internal Revenue does not require a court order.

Once the IRS has levied your wages, what can you do to remove it?

The first thing to do is contact the IRS to request a repayment plan. Do not wait until you are able to pay your tax debt in full before contacting the IRS. Work out a payment plan and the IRS will discuss the various payment options with you.

When contacted, the IRS will want to find out your ability to repay (i.e. how much you can afford). Appeal the levy according to the instructions found in the levy notice. For instance, for an IRS wage levy appeal, request a collection due process hearing with the appeals office stated on your levy notice within 30 days of the levy notice date. You must provide proof to support your appeal if you object to the levy amount.

If you agree with the levy, you can either pay your tax debt in a lump-sum payment or let the wage deduction continue until you clear your debt. IRS interest for late or non-payment is very high so consider borrowing funds from a 401, an IRA distribution, equity in your home, or even a credit card.

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If you or your child is studying overseas, your tuition fees is not treated the same way as if you were studying in the US. For one thing, your fees are not usually tax-deductible. In order to qualify for tax deduction on tuition fees, the tuition and fees have to be paid to an eligible education institution, which is any college, university, vocational school or other postsecondary educational institution eligible to participate in the Department of Education’s Federal Student Aid program. This includes virtually all accredited public, nonprofit and proprietary (privately-owned, profit-making) postsecondary institutions. If you’re not sure whether your college/university abroad is eligible, simply ask them about it.

There are basically three types of tax benefits for higher education expenses:

• The American Opportunity Tax Credit (AOTC)
• The Lifetime Learning Credit (LTLC)
• The tuition and fees deduction

Since tax year 2009, the American Opportunity Tax Credit modifies the Hope Credit. Under the American Opportunity Tax Credit the maximum amount of the credit is increased to $2,500.00. The credit can now be claimed for the first 4 years (not 2) of postsecondary education and the modified adjusted gross income limitations are increased. Also, qualified expenses now include course materials.

Generally you can claim the Lifetime Learning Credit if you pay qualified tuition and related expenses of higher education. If your child is the one studying abroad, you pay the tuition and related expenses for your kid as your dependent for whom you claim an exemption on your tax return. The Lifetime Learning Credit also allows you to deduct a portion of the fees you've paid for college tuition and course-required fees and materials, such as a laptop computer. With this credit, you can deduct up to $2,000 in school expenses for as many years as needed. As with the AOTC, the Lifetime Learning Credit is generally allowed for qualified tuition and related expenses paid in the tax year for an academic period beginning in that year or in the first 3 months of the following year.

Bear in mind that if you have claimed educational expenses elsewhere, under business expenses for example, you cannot claim for the deduction again. Furthermore, if you are already claiming the AOC Scholarship or LTLC for lower-income students, you cannot receive a tuition deduction. There is no minimum expense level required before you can qualify for the deduction. Deductions can be made on tuition paid during the same calendar year of the tax season, including for classes that have not yet occurred. Any money you pay for tuition and fees is tax-deductible. The deduction can count for you, your spouse and your child as long as you and your spouse don't file separately.

Official receipts showing exactly what you spent your money on is the best proof that you can provide. You would also need it in the event of an audit on your tax return.

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