Should Americans living abroad be afraid to catch up on their US expat taxes?

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Greenback Expat Tax Services’ David McKeegan clarifies the implications of filing or not filing- and uncovers whether you really should be afraid of the IRS.

Greenback Expat Tax Services
We don’t know if the IRS’s intent in the 2009 OVDP was to lure US expats into coming forward only to penalize them. However, we have recently seen individuals become compliant under the Streamlined Program- so far we have not seen them get penalized.

US expat taxation is an inflammatory and controversial topic. For many, this debate has intensified with the growing focus of the IRS on identifying foreign bank accounts via FATCA. A recent publication by the ACA “ACA Presents Evidence of IRS Abuse to Congressional Panel Investigating Agency” further fuels the fire and makes Americans living abroad wonder if there is a way to get compliant - without facing the wrath of the IRS. David McKeegan, from Greenback Expat Tax Services explains the different options for US citizens living abroad to become compliant with the IRS and implications to each approach.

It’s important for Americans living abroad to have a full view of the facts, so that they can make informed choices about their financial affairs.

The IRS has issued 3 Voluntary Disclosure Programs since 2009, each with increasing higher penalties

Since Treasury Regulation No. 62 was issued in 1921, Americans living abroad have been required to file taxes, but for a long time this was relatively lightly enforced. In the last 5 years however the IRS has been focusing more on individuals and companies trying to hide money overseas in an effort to make sure that the proper amount of taxation is paid on these monies. To this end, the IRS has run a number of Voluntary Disclosure Programs to encourage individuals hiding assets overseas to come forward, before they are found by the IRS. These programs included reduced penalties and the potential to avoid criminal prosecution and included:

  •     The 2009 Offshore Voluntary Disclosure Program - 20% penalty on highest account balance
  •     The 2011 Offshore Voluntary Disclosure Initiative – 25% penalty on highest account balance
  •     The 2012 Offshore Voluntary Disclosure Program – 27.5% penalty on highest account balance,

In each case, the penalties became progressively more punishing and the IRS did not differentiate between tax evaders trying to hide assets in foreign bank accounts and US expats who simply were not aware that they were required to file a US tax return while living abroad. However, the penalties were reduced for lower account balances and individuals who did not open the accounts i.e. inherited them. The 2012 OVDP is still running and individuals who have been hiding assets overseas should consider it if they are trying to become compliant.    

The IRS and Treasury, via legislation like FATCA, now have more ways to enforce their compliance efforts
The efforts from the IRS and Treasury are intensifying- not quieting down. Programs like the Foreign Account Tax Compliance Act or FATCA are now requiring foreign banks to disclose US account holders, bank balances, etc. or face 30% withholding penalties on all of their US assets. The result has been a number of foreign banks closing their doors to US clients, including those living locally.

This will also mean that it will be much easier for the IRS to find US citizens with bank accounts overseas as the data will be reported directly to the IRS via the banks, without the taxpayer’s knowledge. This will make things harder on money launderers, but also means that US expats who are delinquent on their taxes or FBAR’s are unlikely to be able to ignore the problem and hope it goes away.

More recent IRS Programs are starting to differentiate between expats and those purposefully evading taxes
The IRS launched a new program in June of 2012 known as The Streamlined Filing Compliance Procedure for Non-Resident, Non-Filer US Taxpayers (or the Streamlined Procedure). This program is designed specifically for US citizens living overseas who have fallen behind on their US expat taxes. This is the first program which differentiates US citizens living abroad from money launderers.

The Streamlined Program is for low compliance risk tax payers who want to come back into compliance and offers individuals an expedited review process and no penalties for failure to file tax returns or FBAR’s. But it is only for individuals with low risk situation including owing less than $1,500 per year in US taxes and the “risk level” may be deemed to rise if the individual has material economic activity in the US, the tax payer is already being reviewed by the IRS, if there are indications of sophisticated tax planning or avoidance, etc.

Another tactic many Americans have employed is known as the “quiet disclosure.” Individuals who have “quietly disclosed” have simply come forward and filed back taxes for between 3-8 years and 6-8 years of FBAR’s but have not come in under one of the Voluntary Disclosure Programs or under the Streamlined Program. This has worked for many individuals so far, but the ACA has noted that Quiet Disclosures may come under increased IRS scrutiny based on a report by the GAO entitled “Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion.”

According to David McKeegan “Our experience working with expats is that the vast majority of people who are out of compliance on either their tax returns or their foreign bank account reporting are ordinary hard working Americans who honestly did not understand that they needed to file US taxes. On the face of it, the more recent IRS programs seem to acknowledge that distinction and take that into account more openly. However, the recent concern raised by the ACA calls into doubt the IRS’s intent: i.e. is it to lure unsuspecting American’s into coming forward- only to harshly penalize them in response? Or is it an olive branch designed to ensure that expats aren’t treated the same as criminals? Unfortunately at this stage, we just don’t know. What we do know is that thousands of individuals are utilizing the Streamlined Program and “quiet disclosures” to become compliant with the IRS and that so far we have not seen any of these individuals be audited or penalized.”

More About Greenback Expat Tax Services
Greenback Expat Tax Services specializes in the preparation of US expat taxes for Americans living abroad. Greenback offers straightforward pricing, a simple, hassle-free process, and CPAs and Enrolled Agents who have extensive experience in the field of expat tax preparation. For more information about Greenback Expat Tax Services, the Streamlined Procedure, FATCA, FBAR, or other matters related to US expat taxes, please visit us at http://greenbacktaxservices.com.

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Danielle Buglino
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