25 years of delinquency?!

[SjM]

Hello All,

My first post to the group—I apologize for it being such a long one. I’ve only learned about this site a month or so ago, but I’ve already learned so much. Thank you all for a great resource.

The reason that I stumbled upon the site is because I was looking for information about reporting dividend/capital gains/interest income from US sources (I’m a US citizen). It would be nice if I only needed information for the current filing year (2021), but due to an unfortunate misunderstanding, I haven’t filed this income for the previous 25 years!

When I first came to Japan in 1996, I had been hired from the States on a “visiting scholar” (can’t remember the exact terminology) status which gave me two years of tax-free status. Soon after that expired, I bought some stock ($2000 worth of Apple stock) to go with a few American Funds mutual funds (about $6,000 worth). Since I had not been paying taxes before then, I visited the tax guru at the city office explained my situation and asked about what I needed to do. He asked if I had sold any stock and brought that money into Japan. If not, I wouldn’t need to report anything on the holdings unless I did. I thought that was great—a back-end loaded system—that matched perfectly with my buy it and forget it strategy.

In the 20+ years since, I haven’t sold any shares of anything that I own, so I hadn’t thought about Japanese taxes at all. Well, apparently that was a mistake! I now believe the tax guru was only giving me information about the period when I was not yet a tax citizen of Japan.

So, now I need to get things in order. I’ve started by going back (only could find records to 2010) and itemizing all of the dividend/capital gains/interest income and the yen rates for those days on a spreadsheet. If any of you could give me a bit of advice/info on the following, I would greatly appreciate it.

1. What’s my best course of action? Should I go to the tax office, explain the situation, and beg for minimum penalties (I well intend to pay all of the taxes due, of course). Or, should I seek out a CPA to do my bidding for me? US-based passive income from those years ranged from 300 to 700k (yen) for the last several years—much less than that for a few years before that, and only 10k or so before 2012 (when Apple started paying dividends).

2. For figuring out 2021 numbers, I’ve been reading on this site that it is standard for 10% to be taken out at the US source. I’ve never had a US source do this. Of course, I’ve been reporting the income to my US tax accountant and he has been including that income in my US taxes. Will this affect my Japanese filings? Will I be able to claim a foreign-tax credit?

3. I would imagine that once I’ve come clean, the NTA will demand their money ASAP. What kind of penalties can I expect?

4. Thanks to my incredible luck in choosing Apple as my one and only stock to invest in all of those years ago, it appears that I passed the threshold for required reporting of foreign assets in 2019. Needless to say, I haven’t done that yet either. Can I expect penalties for filing this late, too?

Any insights any of you would have would be very helpful.

Sorry for the long post!

[RetireJapan]

Welcome! My experience with the Japanese tax office is that they tend not to treat honest mistakes too harshly, and mainly focus on getting you compliant going forward.

For this kind of question, I recommend posting it in r/JapanFinance on reddit as well. They have some very sharp people on there

[Beaglehound]

Sorry to hear of your troublesome situation, though asset performance overall will soften the blow! I suspect (from reading the experience of others) they may not insist on going back over the whole period, but may only go back a few years. So you may wish to avoid taking in the full detailed paperwork on first visit. In your shoes I would be tempted to go in, do the ‘mea culpa’ and let them tell you what they expect you to do about it.

[captainspoke]

In a 'light' audit (to invent a term for it) they go back three years. More typically, they go back five. For them to look at anything beyond five requires some serious criminal activity. So go ahead and do your taxes properly for 2021, and then work backwards. 2020, 2019, 2018, 2017, 2016. AFAIK, that would be enough.

For previous years you'll file amended returns. It may be worth paying a local tax accountant to do the corrections/submissions for you (one who is familiar with foreign assets). Accountants here adhere completely to the tax rules, so they will almost certainly do it in a way that is acceptable by the tax office (they may leave it to the tax office to calculate/assess interest for late payment, and any possible penalties).

For the foreign asset declaration, I would just do them--as far back as you need to for when your assets exceeded the ¥50M threshold. I think this, along with the amended returns, will (eventually) get you in good standing.

The tax office charges a relatively high interest rate for unpaid taxes--I don't know exactly but it might be 5%. Penalties vary, but since you'll be 'coming clean' on your own, voluntarily and in advance, they'll be less than if they had discovered you. Amounts due will probably be payable in a month or two.

Also, once these corrections have been made, know that your residence tax for the relevant tax periods will also then be adjusted. So you'll initially pay what you may owe nationally, then later you'll get adjusted residence tax bills.


(and congrats on the apple stock!)

[Wales4rugbyWC23]

Welcome! My experience with the Japanese tax office is that they tend not to treat honest mistakes too harshly, and mainly focus on getting you compliant going forward.

For this kind of question, I recommend posting it in r/JapanFinance on reddit as well. They have some very sharp people on there

There is a starkimpossibility that you might be right about one particular person on JapanFinance on reddit who is very sharp. He has put me straight on a few Japanese tax related matters especially the mortgage tax credit. I reckon he is either a bilingual accountant or a English speaking social media liaison officer for the Japanese tax office. Whichever, he is very knowledgeable and helpful.

[SjM]

Thank you all for your insights--well appreciated. I feel a bit better about the situation now.

I think that pleading my case to the local NTA when I submit the proper 2021 paperwork might be the way to go. I'm prepared to go all the way back to make amendments, but I'll let them decide how many years it should be.

I am curious to see if the reddit gurus have any additional advice, though, so I will post there as well.

Thanks again. I'll post back when my case is resolved.

[beanhead]

There is a starkimpossibility that you might be right about one particular person on JapanFinance on reddit who is very sharp. He has put me straight on a few Japanese tax related matters especially the mortgage tax credit. I reckon he is either a bilingual accountant or a English speaking social media liaison officer for the Japanese tax office. Whichever, he is very knowledgeable and helpful.

Agreed. He/she (?) is like an encyclopedia on Japanese taxation.

[Tkydon]

You can go back and amend your filings for the past three years.
That may be enough for them.
Under normal Audit circumstances, they have the ability to go back 5 years, but under special circumstances they may go back as much as 8 years.
They can't go back any further than that.
You should do 2021, 2020, and 2019, and that will probably be the end of it.

I use this site as my source of JPY exchange rates.

http://www.murc-kawasesouba.jp/fx/past_3month.php

At the bottom of the page
Drop Down Year 年以降前月までの為替データを表示する

you can select every full year.

Capital Gains Taxes are only due on sales. If you didn't sell anything , there are no Capital Gains Taxes. Only dividend and interest taxes.

As a US Citizen, they should not withhold US taxes. It is up to you to file, but under the FEIE you probably will not have to pay any US Taxes.

If you did have to pay US Taxes, then you can claim the Foreign Tax Credit in Japan.

If you are in full-time employment and they have handled all your taxes in Year End Adjustment 年末調整, and if the total overseas dividend and interest Income was less that Y200k in any year, then you do not have to pay Japan taxes in that year.

The history of Apple Dividends is here

https://investor.apple.com/dividend-his ... fault.aspx

The historical Apple Share Price data can be accessed here

https://finance.yahoo.com/quote/AAPL/history?p=AAPL
https://query1.finance.yahoo.com/v7/fin ... Close=true

If you owe taxes for previous years, the interest rate is rather steep, but you can request to spread payments - bunkatsu barai 分割払い.

Interest Income will be taxed under the Aggregate Taxation Method at your Marginal Tax Rate - Marginal National and Reconstruction Tax. 10% Residents' Taxes.
For Dividend Income, you should opt to be taxed under the Separate Taxation Method at the Dividend Tax Rate - 15% National, 0.315% Reconstruction, and 5% Residents' Taxes.

If you had paid any US Taxes on the Income, you can claim the Foreign Tax Credit.

That's what I can think of so far. If anything else, I''ll post an update.

[SjM]

Thank you for your very informative reply. Lots of useful information.

Capital Gains Taxes are only due on sales. If you didn't sell anything , there are no Capital Gains Taxes. Only dividend and interest taxes.

Just to double-check, so even if the (internal?) capital gains from the mutual funds are listed in the 1099-DIV I received, they don’t need to be included as income for my Japanese taxes? If that’s the case, then the my amounts drop quite a bit!

[captainspoke]

The US doesn't "do" internally reinvested capital gains (or dividends). While you can choose (or not) to have those reinvested, they are accounted for first as gains (subject to tax) on year-end tax forms like the 1099, and then used to buy more units/shares.

This difference in accounting at this level and its tax treatment is one of the things that results in the PFIC reporting headache. Non-US funds frequently (typically?) don't specify these distributions as they occur--anything like a gain distribution (short or long term) or dividend is simply swept back into the fund. Teasing that back out for US tax and accounting requirements is near impossible (and I think compounding of those needs to be included in the calculations). Also, for the taxation of gains, the US distinguishes short and long term (held more or less than one year) another twist when trying to deal with foreign fund distributions.

So, any gains/distributions/dividends in the US, tho you may be thinking of them as 'reinvested', are not being internally reinvested/accumulated in the way that that is done here in Japan. You'll need to list them for tax reporting.