Tax Compliance Program For Americans Resident Overseas
05 August 2013
Posted by: Author: Leroy Baker
Author: Leroy Baker
American Citizens Abroad (ACA), the advocacy organization representing expat interests, has written to the United States Treasury and Internal Revenue Service (IRS) recommending a proposal for a comprehensive program to enable tax compliance by Americans resident overseas.
ACA wrote that it "has observed with increasing alarm the ever-widening gap between the reporting and compliance burden placed upon the overseas American community and the bleak statistics reflecting the very low effective compliance rate among this population."
Based on data available, the number of tax filers in the group is estimated at around one million, leaving up to 3m non-filers. However, it believes "that this 'compliance gap' is rooted not in dishonesty or malfeasance, but rather in practical difficulties and inherent inequities many US persons would face in attempting to put their tax affairs in order."
It was disclosed that ACA's experience and research has shown that the majority of Americans overseas looking to become tax and Report of Foreign Bank and Financial Accounts (FBAR) compliant are unaware of their need to file FBARs, do not understand the requirement for filing accounts such as foreign tax-deferred pensions on an FBAR, or are unaware of the need to file US taxes as they are fully compliant with their foreign tax obligations.
Difficulties are also noted with the present roads to compliance. The IRS's Streamlined Filing Compliance Procedures package, introduced in September 2012, is said to be "too restrictive, comports an excessive number of conditions and creates too many uncertainties to truly encourage most non-filers to come forth;" the Overseas Voluntary Disclosure Program (OVDP) is viewed as excessively penalizing and confiscatory for Americans resident abroad, who have most of their assets overseas; and the IRS has strongly discouraged quiet disclosure through normal reporting channels.
The ACA therefore recommends that the Treasury and IRS "adopt a two-prong strategy to facilitate compliance – transform the current Streamlined Procedures into a Comprehensive Compliance Program (CCP) exclusively for bona fide Americans resident abroad, and with terms substantially different from the current IRS Streamlined Procedures; and change the OVDP into a program essentially for Americans resident in the US."
There would then be "two clearly distinct programs for two very different groups of taxpayers – Americans resident in the US who are hiding assets and related revenues in foreign bank account are most likely evading taxes. Americans resident abroad, on the other hand, pay taxes to their country of residence."
The CCP would be open to all non-resident taxpayers who have resided abroad for three years or more, as bona fide overseas residents, and who have not filed tax returns and FBARs, or have filed incomplete or complete tax returns, when they should have. Both first-time filings and amended returns would be permitted under the CCP for both the tax return and the FBAR.
Americans overseas who have already entered under the current Streamlined Procedures or the OVDP will automatically have their files transferred to the CCP. It would be applicable and available not only when the individual comes forth to enter the program, but also when the IRS discovers the non-compliant American resident abroad before the individual has entered the CCP voluntarily.
The IRS will allow the overseas taxpayer the opportunity to enter the CCP under the latter circumstances, but the taxpayer may more likely be subject to an IRS audit and, if any US tax is due, a specific penalty will be due.