Tax Tips for U.S. Americans Abroad
On July 2019, the IRS Large Business and International division (LB&I) announced the approval of six additional compliance campaigns. The one we’re concerned about is the US Expat Compliance Campaign:
U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.
What does the new IRS Expat Compliance Initiative Mean?
At the moment, the IRS has not mentioned any details behind the execution of the new IRS Expat Compliance Initiative. However, there are already various programs aimed at enforcing tax compliance among Americans Abroad.
- FATCA: The Foreign Account Tax Compliance Act enacted into US federal law in 2010. This federal law requires non-US financial institutions to report the assets of US citizens and Green Card holders to the US.
- Denial of US Passports due to significant unpaid taxes: IRC Section 7345 states that in the event at a US taxpayer has $52,000 or more of unpaid taxes, their US passport can be revoked. The IRS began sending certifications of unpaid tax debt to the State Department in February 2018.
- Tax Cut and Jobs Act – Repatriation & GILTI Tax: The most recent and largest tax reform hit US expat business owners hard, assessing tax on their foreign earnings.
With these current programs in place, it might not be so far fetched that the IRS can identify the estimated 9 million Americans living abroad.
Foreign Banks are cracking down on American Account Holders
Most recent US expats can relate to the pain of opening a bank account overseas. The minute they show their US passport or confirm their birthplace was in the US, they will be hit with a pile of US tax forms to complete. These forms will require:
- US Social Security Number
- Current address
- acknowledgment that the financial institution will send their bank data back to the US
For Accidental Americans or those who expatriated longer before FATCA, the forms will mostly like come via post sooner than later. It is known practice that foreign banks are currently searching through their databases to identify US account holders to remain compliant.
For example, France and the Netherlands, two countries with a high population of Accidental Americans may be forced to close up to 40,000 bank accounts respectively in light of the stricter FATCA enforcement.
As with our fellow expats on the ground, we are hoping that it will not come to this and that us Americans Abroad will not be penalized just to be able to live abroad.
Getting ahead of the IRS Compliance Initiative
While this new IRS initiative may seem very threatening, expats should know that the IRS does provide support for international taxpayers.
This support comes in many forms:
- International Taxpayer Hotline: Where IRS agents specializing in international tax law are there to answer your most expat tax questions.
- Voluntary Compliance and Tax Amnesty Programs: Such as the Streamlined Filing Compliance Procedure for Taxpayers Residing Abroad allowing Americans Expats to become compliant without incurring late filing fees.
- Expat Tax Benefits: The IRS has three major expat tax benefits (FEIE, FTC and Tax Treaties) to prevent double taxation of foreign income.
Streamlined Filing Compliance Procedure
For most American expats, becoming tax compliant can be fairly easy to achieve even if they have never filed their taxes. This is done using the Streamlined Filing Compliance Procedure, which requires:
- 3 Years of Completed Prior Tax Returns
- 6 Years of Completed FBARs
- Completed and signed Streamlined Certification
Most specialized tax firms will charge up to $2,000 for this tax package. For most expats who shouldn’t require such personalized support, MyExpatTaxes’ tax software will charge the same annual 149 euro incl. sales tax per year to complete this procedure.
Successful completion of this compliance procedure will ensure your good standing status with the IRS and eliminate any late filing penalties or fees.
Will US Expats have to pay US income tax?
Most US Expats do not end up paying any US income tax if they claim the right expat tax benefits.
The Foreign Earned Income Exclusion (FEIE) will allow US expats to exclude up to $105,900 of foreign earned income from US taxation.
The Foreign Tax Credit (FTC) approach uses income tax paid in the expat’s foreign country to offset any US tax liabilities.
The US has multiple tax treaties with different countries to prevent double taxation of other types of income such as pension income, social security benefits, and more.
While it is more common for US expats, who comply with tax laws, to end up not paying any US tax or even receiving financial family support abroad, there are cases where unfair taxation can occur.
US Expats that are owners of foreign companies with limited liability may face US income tax levied on their foreign profits due to the new GILTI tax laws. Americans investing in foreign mutual funds will also mostly suffer from PFIC reporting requirements and unfavorable investment income taxation.
What to do if the IRS contacts you overseas
First of all, the IRS ONLY sends mailed communication (snail mail). Any unsolicited email or phone calls claiming you owe income tax are most likely frauds to scare US expats.
If you do receive a letter from the IRS either in the form of a notice of bill, you have options:
- You have not been tax compliant, ask for time to request compliance through the Streamlined Filing Compliance Procedure.
- You have been filing and get a tax bill, know your expat tax benefits. If you are not a foreign business owner or investor of foreign mutual funds, you might not owe taxes after all. Complete an amended tax return claiming the best expat tax benefit for you to eliminate your bill.
In conclusion, it seems that the IRS will continue to strengthen its overseas tax compliance regulations. However, that does not mean as a US expat that we have anything to fear. If we need to get tax compliant, there are options to do so without incurring high costs either from the IRS or tax firms.
This is why we built MyExpatTaxes’ tax software for expats. Being an American abroad should not mean that we have to pay 10x what our Americans back home to fulfill the same tax obligations.