Big John, a U.S. citizen living in the Philippines, must file several IRS forms to report his foreign income and bank accounts. These include Form 1040 to report worldwide income, as well as FBAR and FATCA forms to disclose foreign bank accounts and financial assets. Failure to file these informational forms can result in penalties from the IRS, even if no tax is due. The presentation provides examples and thresholds for when these various forms are required.

1. U.S. Income Update
Presented by: Robert L. Wolff
P.O. Box 381
Dumaguete City, Negros Oriental
Philippines 6200
wolff2000@earthlink.net
NY (518) 325-6015
PH 09266485273

2. Disclaimer
I am not an attorney admitted to practice law in the
Philippines. I am an attorney admitted to practice law in
New York. That and 45 pesos gets me a cup of coffee at
McDonalds. Fortunately I have a friend who is a
Philippine lawyer that can give advice.
The following is not a legal advice, but rather
comments and observations.
For answers to legal issues raised by this presentation,
you need to consult an attorney admitted to practice law
in the Philippines.

3. Are You A US Retiree living in the Philippines?
If your answer is yes, you most likely will need to file a US income tax
return to keep your US tax status intact.
In addition to the 1040, there are number of other IRS Forms that
may need to be filed.
Most of these IRS Forms are informational, meaning that you will pay
NO tax. However, not filing can result in IRS penalties.
The following is a discussion of some(but not all) the forms that may
need to be filed.

4. United States – Philippines Tax
Treaty
The U.S. and the Philippines tax their taxpayers on a worldwide
basis. The U.S. - PH Tax Treaty helps to avoid double income
taxation. The following are some of the provisions important to
U.S. persons living in the Philippines:
Rental income is taxed in the country where the real property is
located.
Capital gains on the sale of real property is taxed where the real
property is located.
Capital gains – the treaty generally provides that capital gains
derived by a resident of one country will be exempt from tax by the
other country. However there are many exceptions to this rule.
Annuities paid to residents of one country are exempt from tax by
the other country.

5. United States – Philippines Tax
Treaty
 Child support payments paid by a resident of one
country to a resident of the other are exempt in the
recipient’s country.
 Social Security and other public pensions paid by one
country to residents of the other are taxable only in
the source country.
 Dividends -- each country may tax dividends paid by
its companies to shareholders residing in the other.
 Interest – each country may tax interest income of its
residents arising in the other country.
 There are many other important provisions of the Tax
Treaty NOT discussed herein.

6. Taxation of Income Earned In The Philippines
The United States taxes U.S. citizens and
resident aliens on their worldwide income, even
when they live and work abroad for an extended
period of time.
There is an exclusion of foreign earned income
from income subject to U.S. income taxes up to a
set amount. Therefore not all income earned
outside the U.S. is taxed.

7. Exclusion From Income
 The maximum amount of exclusion for 2015 is $100,800,
in 2014 it was $99,200. Note - there are also housing
and other exclusions from income.
 If foreign taxes are paid and the foreign earned income
exceeds $100,800, the taxpayer must also file a Form
1116 to claim foreign tax credits to avoid double
taxation.
 Very important, you must file for the income exclusion
before being contacted by the IRS to be able to claim the
income exclusion.

8. The Big Two
FBAR and FATCA
Why You Need to Care
Because NOT Caring may
result in problems with the
IRS

9. Foreign Bank and Financial Account
(FBAR) notices – Who Must File
Any US person with a foreign bank or
financial account aggregating more than
$10,000 at any time during the year must
report that account on an FBAR Notice.

10. How are accounts valued?
$10,000 is met if
 At any time of the year
 Aggregate value of all foreign accounts
 Are in excess of $10,000
 Regardless of whether accounts generated income or
dividends
 If non-liquid asset, 12/31 value
 If asset sold during year, value at date of sale
 All values must be converted to U.S. dollars.

11. Filing Requirements For FBAR
 Filing Requirements applies to any:
 U.S. Person with a
 Financial Interest (or)
 Signature Authority ( or)
 Other Authority
 Over a Foreign Financial Account: more than
$10,000 (in aggregate) any time during the year.

12. Who is a U.S. Person?
 Individual (i.e., citizen and resident aliens in the
US with regard to their own accounts, or owns
 more than 50% of the shares of a Foreign
corporation
 more than 50% of the profits of a Foreign
partnership
 U.S. Domestic Trusts & Estates
 U.S. Domestic Corporations
 U.S. Domestic Partnerships

13. What Is A Foreign Financial Account
 A Foreign Financial Account is a financial account located
outside of the United States.
 For example, an account maintained with the Bank of
Dumaguete branch in New York City, New York – no filing
requirement.
An account maintained with the Bank of USA branch in
Dumaguete City, Philippines – may have a filing
requirement.
There are exceptions not discussed herein.

14. FBAR – Penalties
There are three types of penalties applicable for failing to file FBAR
reports;
Due to Negligence,
Non-Willful, and
Willful.
It should be noted that the penalties are assessed per account and
not per FBAR filing.

15. FBAR – Penalties
Penalties for failing to file an FBAR can be harsh. Imposition of
penalties that generally applies to corporations rather than
individuals
If a failure to file is due to NEGLIGENCE, a civil penalty up to
$500 per account may be assessed.
If there has been a pattern of negligent failures to file FBARs, a
civil penalty up to $50,000 per account may apply.

16. FBAR –Penalties
Non-Willful Penalty
Up to $10,000 for each negligent violation
No Criminal Penalties Assessed
Willful Penalty
Up to the GREATER of $100,000 or 50% of the amount in the account at
the time of the violation
Criminal Penalties of up to $250,000 or 5 years in jail or both
It is difficult for most U.S. persons to avoid the willful penalty
Willful Penalty While Violating Certain Other Laws
Up to the GREATER of $100,000 or 50% of the amount in the account at
the time of the violation
Criminal Penalties of up to $500,000 or 10 years in jail or both

17. Deadline for Filing the FBAR
Notice
The FBAR notice must be received by the IRS Detroit
Service Center by June 30.
No extensions.
Must be filed electronically.

18. Potential FBAR Filers
Example #1
Big John is a U.S. citizen who stays in the Philippines from
December to March each year. For his convenience he opens an
account with the Bank of Manila. Does he have to file an FBAR
notice with respect to this account? Maybe, it depends if his
account is more than $10,000 at anytime during the year.
BJ
US
U.S.
Dec. Mar
Philippines

19. Example #2
Big John, a U.S. citizen has retired in the Philippines. For
his convenience, Big John opens an account at the Bank of Manila.
At its peak, the account balance is $15,000, but on December 31
the balance is only $8,000. Because the account’s highest balance
of $15,000 during the year was above $10,000, Big John must file
an FBAR.
B J
US
U.S
$15,000 to $8,000 bank
balance
Philippines

20. Multiple Account
Multiple accounts are aggregated to
determine whether they meet the $10,000
threshold.

21. Example #3
Big John, a U.S. citizen, lives in the Philippines and has two bank
accounts in the Philippines. The first account, at the Bank of Dumaguete
City, has a peak balance of $2,500 and a year-end balance of $55. The
second account, at the Bank of Manila, has a peak balance of $8,000 and a
year-end balance of $3,000. Total end of year balance of both accounts is
$3,055. Because the aggregate of the peak balances exceed $10,000 ($2,500
plus $8,000 is $10,500), Big John must file an FBAR for the two accounts.
Bank of Dumaguete
City
Peak: $2,500
12/31: $55
Bank of Manila
Peak: $8,000
12/31:$3,000
U.S
Philippines
B J
US

22. Ownership in a
Foreign Corporation
A U.S. person also has to file an FBAR if he or
she owns more than 50% of a foreign corporation
that has a foreign bank account in excess of
$10,000.

23. Example #4
Betsy Smith owns a 90% of BS, Inc., which wholly owns a
Philippine subsidiary called Phil Co. Phil Co. has a bank account
with a dollar equivalence of $25,000 at the Bank of Manila. Betsy
Smith and BS Inc., both must file an FBAR with respect to Phil Co.
account at Bank of Manila.
B
S
US
Philippines
Phil Co.
$25,000 in
Bank of Manila

24. Non-Compliance – What to Do?
 6694 Issue - understatement of taxpayer’s
liability? Are there other tax compliance issues?
 Do nothing – tax fraud?
 Amnesty program - file delinquent returns?
What to do - file your FBAR Notice, so you don't
have to ask yourself these questions.

25. Enough FBAR Gloom and Doom. Lets
move onto FATCA – One of Obama's Gifts
To U.S. Taxpayers

26. 26
FATCA -The Foreign Account Tax
Compliance Act
 FATCA was enacted March 18, 2010, as part of the Hiring
Incentives to Restore Employment (HIRE) Act. Many of
the FATCA rules become effictive July 1, 2014.
 FATCA carries far-reaching disclosure and reporting
requirements for U.S. taxpayers with foreign accounts
and assets.
 As well as disclosure and reporting requirements for
foreign financial institutions with accounts owned by U.S.
taxpayers.

27. FATCA’s Filing Requirements
FATCA’s filing requirements are similar to
those of FBAR requirements, except it is
filed with the taxpayers tax return. FBAR
is filed with the Treasury Department
independently of tax returns
 FATCA’s definition of a U.S. person, who
is referred to as a Specified Person, is
similar to the FBAR rules.

28. FATCA And FBAR RULES
Over Lap
 A U.S. person who is not subject to FBAR filing
requirements maybe subject to the FATCA filing
requirements
 For example, a U.S. person who owns stock in a
Philippine corporation held in the Philippines with
a value in excess of $50,000, does not have an
FBAR filing requirement, but they may have an
FATCA filing requirement.

29. FATCA Filing Thresholds
Filing Status Living in the U.S. Living Abroad
Single
SFFAs valued at more
than $50,000 on the last
day of the year or more
than $75,000 at anytime
during the year.
SFFAs valued at more
than $200,000 on the
last day of the year or
more than $300,000 at
anytime during the year.
Married filing jointly
SFFAs valued at more
than $100,000 on the
last day of the year or
more than $150,000 at
anytime during the year.
SFFA valued at more
than $400,000 on the
last day of the year or
more than $600,000 at
anytime during the year
Married filing
separately
SFFAs valued at more
than $50,000 on the last
day of the year or more
than $75,000 at anytime
during the year.
SFFAs valued at more
than $200,000 on the
last day of the year or
more than $300,000 at
anytime during the year.

30. The Minimum Penalty
 The minimum penalty for failure without reasonable cause to
submit the required disclosure is $10,000.
 Ninety days after notification from the Treasury Department of a
failure to submit the required disclosure, the penalty increases by
$10,000 for every 30 days of continued failure to submit the
disclosure up to a maximum of $50,000.

31. FATCA Penalties
 Under FATCA, there may also be an additional
penalty of 40% for substantial understatement of
income, negligence or disregard of the FATCA
rules, not attributable to fraud (for which a 75%
penalty applies).
 FATCA also extends the statute of limitations
from 3 to 6 years for omissions of accounts of
more than $5,000.

32. The following are FORMS that may need to
Be filed For Trusts
 Form 3520 - Annual return to report the creation of
or transfers to Foreign Trusts
 Form 3520-A - Annual return of Foreign Trust with
U.S. Beneficiaries

33. Corporations Formed In the Philippines And The
Transfer Of Assets to Philippine Corporations
If you form a corporation in the Philippines or
transfer money or property to a Philippine Corporation
you MAY need to file one or more forms with the IRS if:
If the corporation is deemed to be a Controlled Foreign
Corporation (CFC) or;
If there are transfers of cash and/or property to a
Philippine Corporation.

34. U.S. Controlled Foreign Corporations
The two types of U.S. taxpayer that need to be
concerned about the Controlled Foreign
Corporations (CFC) rules:
Those that create a corporation in the Philippines
U.S. taxpayer that inherits stock of a Philippine
corporation

35. Test to be a CFC
For a foreign corporation to be a CFC, the following facts
must be present:
oOne or more U.S. shareholders must own 10% or more of the
total combined voting power of all classes of stock entitled to
vote, and the 10% U.S. shareholders must collectively own
more than 50% of the total combined voting power of the
corporation’s outstanding stock or more than 50% of the total
value of the stock of the corporation.
oIf both facts exist, the corporation is a CFC.
oIf either one of the facts do not exist, the corporation is not a
CFC.

36. CFC Penalty For Failure To
File
The penalty for failure to file with regard to a CFC is $10,000,
with an additional $10,000 for each month that the failure
continues, following a period of 90 days after the taxpayer is
notified of the failure by IRS, to a cap of $50,000 per return.
Note – A 10% U.S. shareholder of a CFC is subject to U.S.
income tax on the shareholder’s proportionate share of the
CFC’s Subpart F income whether or not the CFC distributes
the income.
Note – there may also be FBAR and FATCA filing
requirements.

37. Transfers Of Cash and Property To Corporations In
The Philippines
A U.S. person that transfers cash or property to a Philippine
corporation must report the transfer, if;
Immediately after the transfer the person holds directly or
indirectly at least 10% of the total voting power or the value of the
foreign corporation; or
The amount of cash transferred by the U.S. person to the foreign
corporation during the 12-month period ending on the date of the
transfer exceeds $100,000.

38. Penalty For Not Reporting A Transfer To A Philippine
Corporation
 The penalty for not reporting the transfer is 10%
of the fair market value of the property
transferred.
 The penalty is limited to $100,000, unless the
failure to comply was due to intentional
disregard of the filing requirement.
 Note- there may also be FBAR and FATCA filing
requirements. Plus there maybe a CFC filing
requirement.

39. ITIN Numbers
When claiming spousal tax benefits or exemptions for
dependents on your income tax return:
You must generally list on your income tax return the
SSN of your spouse or the person for whom the
exemption is claimed.
If your dependent or spouse does not have or cannot
get an SSN, then you need an ITIN.

40. What is an ITIN?
An ITIN or Individual Taxpayer Identification
Number is a tax processing number that is used when
an individual can not get an SSN.
 An ITIN is obtained by filing a form and the required
information with the IRS.
 To obtain the ITIN, documentation must be provided
to the IRS to substantiate foreign status and identity
of the individual applying.

41. Benefit of the ITIN
Assumption No.1 Single Taxpayer, Taxable income $50,000 Tax
Liabilities:
Income $50,000
Standard Deduction $( 6,100)
Personal Exemption $(3,900)
Taxable Income $40,000
Tax Liability $6,375
Assumption No. 2 Some Facts, except Married filing a Joint
Return.
Income $50,000
Standard Deduction $(12,200)
Personal Exemption $(7,800)
Taxable Income $30,000
Tax Liability $4,500
Tax savings $1,875

42. Other Penalties To Watch Out For
Fraud Penalties – underpayment of tax due to fraud are subject to a
penalty of 75 percent of understatement of income or underpayment of
taxes;
Failure to file tax return – this penalty may be imposed in certain
circumstances, amounting to 5 percent of the net tax amount required
to be shown on the tax return for each month or fraction thereof with a
cap of 25 percent.
Failure to pay the tax due, a late payment penalty may be imposed
equal to a .5 percent of the late payment monthly with a cap of 25
percent;
Accuracy related penalty – A penalty of 20 percent may be imposed on
any underpayment attributable to negligence or substantial
understatement of income

43. Other Forms
 There are other forms that may need to be filed
not discussed herein.
 The presentation attempts to identify the more
common forms other than Form 1040 that may
need to be filed by U.S. taxpayers living in the
Philippines.

44. Summary of Tax Issues
 The United States and the Philippines subject their citizens
and residents to income and estate taxes on a worldwide basis.
 There is a U.S./Philippines Income Tax Treaty which eliminates
many income tax issues, but there is no U.S./Philippines Estate
Tax Treaty.
 If you are a U.S. citizen or resident residing in the Philippines,
the IRS wants to know if you have any accounts or assets in the
Philippines. Therefore, there are various forms that may need
to be filed such as the FBAR filing.
 The U.S. is becoming more aggressive in identifying foreign
assets and taxing them. Who is to say the Philippines will not
become more aggressive in collecting income and estate taxes
outside the Philippines.

45. Filing the Required Notices
Most notices and forms required to be filed by the IRS
are not complex forms or that difficult to prepare.
However, failure to file a required notice or form can prove
to be expensive and trigger other problems with the IRS.
 Remember, if your buddy, advisor, accountant, etc., is telling you
not to worry about a notice or form that needs to be filed, such as
the FBAR notice, because they think the IRS will never find your
account or asset in the Philippines, it is you -not them- who will
incur the wrath of the IRS for failure to file.
 Not complying with many of these filing requirements such as the
FBAR notice can cause financial ruin due to the penalities, even if
no tax is due.

46. IRS Circular 230
Pursuant to Internal Revenue Service Circular 230,
we hereby inform you that the advice set forth herein
with respect to U.S. federal tax issues was not intended
or written by the law firm of Robert L. Wolff to be used,
and cannot be used, by you or any taxpayer, for the
purpose of (i) avoiding any penalties that may be
imposed on you or any other person under the Internal
Revenue Code or (ii) promoting, marketing or
recommending to another party any transaction or
matter addressed herein. Taxpayers should seek
advice based on the taxpayer’s particular circumstances
from an independent tax advisor.