Admitting Defeat On Tax Form 5471… For This Year Anyway

OK. I give up.

I started working on my U.S. tax returns last week. Ordinarily, that’d have allowed me plenty of time to finalize everything in time to file on the 15th.

But these are not ordinary times, dear fellow offshore American.

The changes as represented on Form 5471 and the accompanying schedules that the IRS has put together in response to the Tax Cuts and Jobs Act of 2017 are not ordinary but abstruse.

Byzantine even.

Most don’t apply to an American running a small business in another country. Yet, while the changes target the big dogs of FAANG and other American multinationals, we small guys now face the same complicated filing requirements.

And it’s not as if the IRS tax code wasn’t complicated enough already. So complicated, in fact, that IRS staff is specialized. Each understands typically his or her narrow section of the tax code and little beyond.

Years ago, I had what should have been a simple tax loss to deal with.

Unfortunately, the rules made the application of the loss more complicated. They allowed you to take the loss and apply it to prior years and request a refund.

However, the path you were required to follow wasn’t straightforward.

According to the IRS rules, you couldn’t carry the loss back to the prior year. You had to go back two years and then start moving forward.

Two years prior, a foreign tax credit had made my U.S. tax zero. Taking the current-year tax loss back two years didn’t mean a refund for me in that year. It just changed the reason my taxes were zero on that return.

OK… I carried on following the rules…

I carried the foreign tax credit over to the next year… a year when, it turned out, I had paid taxes.

Now, the new tax credit generated a refund for that year.

It sounds complicated, and it was, but I painstakingly followed all the rules. I went back two years, amended that return, then carried forward the tax credit and amended the next year’s return.

The refund this resulted in was big. However, the amount eventually deposited in my account by the IRS was about half what I expected.

What to do?

I asked a tax attorney colleague at the time what he thought. His response was, “Take what they sent you and move on. You’ll never see the rest of your refund. Be happy you got anything.”

I wasn’t inclined to walk away from that much money. Really, though, by this time, it was the principle of the thing. I had spent a lot of time following the IRS’s rules to the letter, and I wanted to know why they changed the refund. Had I misunderstood the regulations or made a mistake somehow?

After a few calls to the IRS I was put in touch directly with the IRS agent who had reviewed my amended returns. She was a specialist in tax loss carrybacks. After a short conversation, she agreed to release the rest of my refund.

The issue she had was the foreign tax credit. She knew loss carrybacks, but she didn’t understand foreign tax credits… and that they could be carried forward. Foreign tax credits simply weren’t part of her IRS beat.

Many people don’t like the IRS or their agents. I’m sure some agents aren’t very nice, but the lady I spoke with was professional and understanding… and took the time to talk through the complexities of my situation.

In fact, every time I’ve had to call the IRS to get clarification on a specific matter, I’ve found the agents I’ve dealt with to be professional. It’s just a matter of getting to the person who knows the answer to the question you’re asking.

I’m sure IRS agents would prefer the IRS code to be simpler than it is as much as the rest of us would. It wouldn’t mean they were out of a job… only that their job would be less complicated.

Meanwhile, the new Form 5471 along with the dozens of references to different sections of the IRS code relevant to offshore entities require connecting a lot of dots… and April 15 is now just seven days away.

Uncle.

I’ve decided, for the first time in more than 20 years of being an American offshore, to pay someone to complete my corporate tax return this year.

Maybe by this time next year, I’ll have gotten my head around the changes.

Lief Simon