IRS Planning a Perfect Storm for American Expatriates not…
Despite IRS several amnesty programs going back to 2012, implemented to encourage Americans living in foreign countries to file delinquent tax returns without the threat of severe monetary penalties and possible criminal charges, some estimates are that as many as 7 million Americans who live in foreign countries have not filed U.S. income tax returns and reports of foreign financial accounts for many years-some never since they moved out of the U.S. Because many of these American expatriates pay their taxes to the country in which they live, and wrongly assumed that they no longer had a U.S. tax filing obligation (as is the case in mostly all countries for citizens with no income from their home country), and were not aware that the U.S. requires that every citizen or permanent resident (green card holder) to file U.S. tax returns, even if they have no U.S. investment or other income or if all of their foreign income is offset by taxes paid to their host country or eliminated by special deductions such as the foreign earned income exclusion. Whatever the reason, the IRS has provided opportunities for American expats to bring their taxes up to date without penalties or significantly reduced penalties provided that the delinquency was not due to willful intent (to hide money and evade paying U.S. taxes), and they have been extremely lenient as far as excuses by including “a misunderstanding of the law” when there was minimal taxes owed and faxes were filed under the amnesty programs and brought up to date. For those who owed relatively small amounts or no U.S. income tax due to special exclusions, deductions or foreign tax credits and other double tax avoidance relief, the initial amnesty program from 2012 was enhanced in 2014 with the Streamlined Procedure that increased the amount of tax due and other provisions before the returns would be required to be filed through an attorney under the Overseas Voluntary Disclosure Program (OVDP). Under the Streamlined Program all the IRS wants to see (regardless of how delinquent someone is) is three delinquent prior year income tax returns and foreign bank account reports (FBARS) for the prior six years.
The IRS has always made it clear that these amnesty programs were not indefinite, and that someday they would be closed without advanced notice. The word is that the IRS Commissioner stated at a conference last year that the Streamlined Program may be coming to an end sooner than later. Another possibility is that the program could be modified for a short time before coming to an end whereby the number of past due income tax returns was increased from 3 to 5 in tandem with new program for Americans who renounce their citizenship.
According to my sources, due to the U.S. economic stimulus costs resulting from Covid-19, adding trillions of dollars to the U.S. deficit, the IRS has been given marching orders to begin preparing to mobilize rapidly to collect taxes, fines and interest from American expatriates residing in foreign countries outside the U.S. Now that the implementation of the Foreign Account Tax Compliance Act (FATCA) , legislated in 2010, is virtually finalized, the IRS has the resources to identify mostly all Americans with financial accounts maintained in foreign countries. Foreign banks and financial institutions of all types, in all major countries around the world, have given notification to American account holders that they are required to provide social security numbers, or their accounts will be closed. As a hammer, FATCA requires that U.S. investment income of non-participating foreign financial institutions are subject to a 30% withholding of U.S. tax. Not only does the IRS know the identity of Americans with foreign bank accounts, and have now matched them against the database of people who have either filed or not filed U.S. income tax returns and required foreign bank and financial account reports, but the IRS is also exchanging information with participating foreign revenue agencies and informing them of citizens of their country with U.S. financial investments and bank accounts. The U.S. database of Americans with delinquent tax returns who have foreign accounts is now being substantially enhanced through the process of issuing Covid stimulus payments.
Participating financial institutions of treaty countries have been exchanging information regarding foreign account holders now for several years; however now that the database is virtually complete, Congress may very well grant the IRS request to expand their budget for the purpose of using the information in the FATCA database to locate delinquent U.S. taxpayers and prepare substitute tax returns whereby the tax is determined based on gross income, without deductions at the highest rates, along with penalties and interest to within the near future. This process is now significantly simplified for the IRS with their new computer programs and can be implemented without a substantial increase in personnel.
So as the storm clouds converge, exacerbated by this Covid-19 deficit, it may well be prudent for American expatriates who are delinquent in filing their U.S. tax returns, FBARs and paying U.S. tax owed to IRS on income not taxed by foreign countries, to speak to seek assistance from a competent U.S. International tax specialist who can help get them caught up now, before the window of opportunity to file for only a few years, without penalty, is closed. For those who don’t know, there is no statute of limitations preventing the IRS from assessing tax and penalties against an American when there was no tax return filed. Just think of it from the Treasury Department’s view. If they close the program and collect only $1,500 from 7 Million Americans (including “accidental Americans”, that is $10.5 Billion. Not nearly enough to cover the costs but enough to cover the first year’s interest on the debt that is attributable to the pandemic.
If you are an American expat who is behind in filing U.S. returns, I suggest that you tackle this now before it is too late. Also, to add salt to the wound, during the past years Penalties have been imposed even when there is no tax due, and the penalties for not filing these foreign bank information reports could amount to tens of thousands of dollars or more.