I’m assuming the technical answer is “since income tax was instituted.” But the practical answer must be more recent. I gather (from FATCA and some other laws) that they are still having problems with compliance, or think that they are.
There are a lot of different scenarios—my great-uncle was born in the US, lived here for three days, and then left, never to return. He never had a social security number and certainly never filed US taxes, despite his technical obligation to do so. His mother, an American who left as a teenager, didn’t either (SSN or taxes). I meet lots of dual citizens here who have never filed US taxes, and it doesn’t seem to harm them.
How does the IRS know who Americans abroad are, other than those who self-identify by filing taxes? How do they enforce the requirement to file, other than by threats that assume the taxpayer is in the US or has assets there? Do they trade data with other agencies?
Note: this is inspired by tax-season curiosity about the methods. I file my taxes, both sets. You should too. Civic duty and all that, plus noncompliance isn’t worth the risk.
It looks like there may be some exclusions to the rule (see below). Your relatives seem to fall into category #1. But why do they keep their duel citizenship if they never intend to live in the US? AFAIK they can simply renounce their citizenship and they would no longer be required to pay US taxes under any circumstance.
How do I know if I qualify for the Foreign Earned Income Exclusion?
The IRS qualifies you as eligible for the Foreign Earned Income Exclusion (FEIE) if you fall into one of three categories:
You are citizen of the US who qualifies as a bona fide resident of another country for a period of time containing one entire tax year.
You are a resident alien of the US whose home country has an income tax treaty with the US. Additionally, you must be a bona fide resident of another country for a period of time containing one entire tax year.
The reality is most people would not need to pay U.S. taxes if they are resident in a foreign country but hold American citizenship. The foreign earned income exclusion is quite high and automatically increases with inflation–it’s almost $100,000 now. It means that the first x amount (whatever the year’s FEIE is) is excluded from taxation, so you are only taxed on dollars earned over that amount. Since $100k is significantly higher than median income in pretty much any country, I’d wager the overwhelming majority of persons who happen to have American citizenship but live and work out of country do not need to pay American taxes at all.
The Foreign Earned Income Exclusion is only about whether you owe taxes. You still have to file them, otherwise how would they know? I live abroad, and every year I file the 1040 plus the form for the FEIE, and send copies of my Canadian taxes. If I didn’t do that, sure, I’d have a zero balance, but I can’t imagine the IRS just saying “Oh, he didn’t file taxes this year. Probably lives abroad, FEIE and all that. No big deal, we’ll wait until he comes home and starts filing again.”
As to why my relatives didn’t drop their US citizenship—a different generation. They didn’t care. There’s also a hefty exit tax now, meaning that you have to pay a significant fee to cease being an American. Also, apparently it becomes difficult to visit the US if you have renounced your citizenship. I don’t know how true that last one is or isn’t.
The United States has a number of income tax treaties with other countries. These tend to address things like avoidance of double taxation. However, I suppose it’s possible that their terms also obligate the signatories to share information on earners with a view to catching tax evaders. For example, perhaps signatories are required to inform the US when it’s aware of a US citizen resident in their country earning more than the FEIE limit for that year. Does anyone know if this is the case?
I would add the caveat that 1) this exclusion only applies to non-Federal income. If you live abroad but are paid by the US government you still need to pay income taxes. 2) It only applies to income taxes, not payroll taxes such as FICA.
I’ve lived in Panama for more than 20 years, and since I qualify as a bona fide resident I don’t pay income taxes because my income is under the exclusion. However, I do have to pay payroll taxes.
As a practical matter, someone who is a US citizen living overseas but doesn’t have an SSN or make a very large amount of money is probably not going to draw the attention of the IRS. Technically, though, they are supposed to comply.
As far as monitoring goes, I imagine that the easiest case would be people with an SSN who previously filed taxes within the US but then moved abroad, since the system would raise a red flag if a year goes by without a return.
Right, but maybe I’m just a bit more experienced with people on the lower income range (I grew up in a rural/poor part of Virginia), lots of people I’ve known have gone years without filing taxes because they know they don’t owe anything. There is little to no practical consequence as the IRS has no interest in going after it. In most of their cases they actually would be entitled significant credits and even refundable credits like the EITC that can allow for a greater refund than you paid in taxes in the year–so it is only to their detriment and the government’s gain that they don’t file.
Terry Gilliam was born in the U.S. but renounced his citizenship sometime in the 2000s for political reasons, I remember him saying in an interview that it put him into a different category than ordinary British citizens. Ordinarily Brits can come to the U.S. under the Visa Waiver Program and stay for 90 days as long as it’s a trip for business/pleasure/transit. I believe also if they then leave the United States they can reenter for another 90 days–so in theory you could hang out in the U.S. for almost every day of the year as a British tourist, legally, as long as you didn’t expect to be able to work on transition it into an immigrant classification.
Gilliam claims he’s only permitted 29 days a year in the United States.
Sooner or later, these people come back - and their domestic employers will suddenly be reporting income on their behalf. The IRS may not notice that you didn’t file a return for seven years, but it will certainly notice once you file one in the eighth year.
If you are certain you are never returning to the US, and have no US assets, there is effectively no way to enforce the requirement against you.
I’ve known several Americans who did just that, said screw it because they didn’t owe anything. I’ve never heard of anyone getting popped. Some of them I’ve lost track of, and they may even be back in the US now, so I imagine it could have caught up with them by now. But I know two who still aren’t filing and even go to the US regularly and renew their passports through the embassy. Nothing’s happened to them so far.
Yes, American expats are generally eligible for the Foreign Earned Income Credit by filing form 2555. It allows expats to exclude foreign earned income up to US$97,600 for the 2013 filing year (taxes filed by April 15, 2014).
There is also a foreign housing exclusion that may permit you to deduct a portion of your overseas housing expenses, up to 16% of the allowable maximum Foreign Earned Income Credit. That limit is up to $15,616 for the 2013 filing year (US$42.78 per day).
Finally, of note, there are provisions on double taxation according to treaties with many countries. This effectively allows you to offset your US income tax by an amount paid in income tax to a foreign government. Payments of other kinds of taxes to the foreign government may not qualify for a deduction.*
As to how the government finds US expats… FATCA and FBAR. They are dramatically escalating efforts in enforcement of FATCA and FBAR filing requirement under the presumption that American expats who would owe US income tax after all the above exclusions and deductions are going to have a fat bank or investment account somewhere.
The IRS is counting on foreign banks and financial services to disclose accounts of Americans under threat of dramatic penalty against the bank/financial services provider. Some banks have simply chosen to stop doing business with Americans, closing the accounts of any American customers.
Of course and Americans holding dual citizenship may be able to avoid FATCA and FBAR scrutiny by using their other passport when opening the financial account. Should be a real boon to some small countries that still have economic citizenship programs. When you can invest $500,000 in a small country and get a second passport it might be well worth it to then use that passport to hide your other offshore assets.
A couple years ago the Cayman Islands Government floated a proposal for a “Community Enhancement Fee” of 10% of the income of expats. In effect this was an income tax payable only by expats. But in practice it was not clear whether this fee would be considered an income tax by the IRS for the purposes of determining double taxation. A rose may not always be a rose.
Well, I might take that bet, since I think that the average salary of Americans living and working in foreign countries is higher than either the US average or the host country’s average. Companies in Saudi Arabia or Finland don’t generally hire ditch-diggers from the US; they hire experienced engineers and the like (and in Saudi’s case, have to pay hefty salaries to get them to come).
Sure, there are probably also lots of hippies teaching English for room and board in Thailand or whatever, but I still think the average is higher.
As a practical matter, nobody will pay any attention. IRS cannot claim that you had income while abroad, unless they have some documentary evidence to back it up. Suich as, if the US has a tax treaty with that country and there has been an exchange of income records, and even then, if you never disclosed your US Tax-ID (SS) number, there would be no effective paper trail.
There used to be a policy that if you apply to renew your passport overseas, they ask if you filed US income tax for the years you were abroad. Just say no. If No, do y ou wish to receive income tax forms for those years? Just say No again. There is no follow up.
I’d need to see hard numbers, because a lot of the people working abroad who have American citizenship are:
Activists like you mention–and famously not super highly compensated.
Persons who are legally natural born American citizens (jus soli or jus sanguinus) but who are also citizens of another country and have never lived or only briefly lived in the United States. For example a person born to a British mother and an American father who never resided in the United States at all, or one who may have been born in the United States but his family migrated back to his mother’s home country when he was very young. This individual would effectively be expected to earn at his resident country’s average as he would essential just be an average person from that country.
Your aforementioned highly compensated individuals.
I don’t know what the breakdown would be, but I wouldn’t be shocked if there are a lot of people who fall into that second category who would be expected to earn at no different than average for their resident country. Then a lot of persons in the first category expected to perhaps earn even less than average if the resident country is in the first world.
This IRS is patient that way. If you move money through any official channels in the US (banks, employers, investment firms) the IRS will be able to track it. If they do not see any activity under your SSN and no replies to various bits of mail, they will figure you are dead and nobody bothered to let them know. However, if you pop back up on their radar, then they will be looking long and hard at the years you were “off the grid” if you were out of the country, they will want you to file returns, but probably not going to meet the minimums as mentioned above.
Alas, this is exactly what a foreign bank now must do to comply with FATCA. Ask every single customer to prove citizenship so that they can disclose accounts of Americans. The bank is responsible to determine if a customer is a US person for tax purposes and report accounts of those who are.
The two largest banks offering retail services in Cayman have no physical presence in the United States. No offices, branches, or services centres of any kind. Yet you must provide proof of citizenship to open any account. Other on-island banks are similar. They are sending out letters to current account holders if they do not have adequate proof of citizenship on file and threatening account closure if documentation is not forthcoming.
The wikipedia article on FATCA quotes Canada’s Finance Minister Jim Flaherty saying FATCA has “far reaching and extraterritorial implications”. It has been noted by critics that FATCA makes foreign banks and financial institutions take on substantial administrative burden in order to offer services to US citizens.
A number of Canadians have dual US citizenship.
The mentioned case “left when they were 6 months old” is also not uncommon.
Any Canadian banks that want to keep interacting with America - receive payments from US banks, use the ATM network, etc - have to cooperate with FACTA. IIRC the penalites for failure to report US citizens boil down to about a 33% withholding on all transactions to that bank… basically, that bank is kicked out of the international banking system, considering how central the USA is.
there was a thread a while ago where some foreign banks are just dropping anyone with a hint of being a US citizen, rather than deal with the paperwork of filing complex government forms every quarter…
Given that, any non-US bank that even suspects their client is American is better off giving them the boot than giving them benefit of the doubt. If the bank is cited for failure to report, maybe a few months or years arguing their way through the bureaucracy in Washington, plus the expense and lawyers, will eventually have the sanctions lifted and not cause the bank to fail. It’s unclear whether the money withheld during that time would be returned to the bank. Who wants to find out?
As for the requirement to declare assets over $100,000 - after a decent number of years a retirement savings plans like Canada’s RRSP will likely exceed that limit. Failed to declare that asset by FACTA’s deadline a few months ago? Criminal offense.
Also, anyone entering the USA will have their passport scanned. If the birth date and name match something on the USA citizen database, maybe they’ll haul the guy aside. They flag other things - why wouldn’t they flag IRS non-compliance one of these days? AFAIK they are not yet flagging failure to file taxes, but I’m sure that it’s a matter of time. If the birthplace is USA, it’s a no-brainer. Then the only alternative for US expats is to avoid the land of the free.
There have been threads on this before. A couple of posters said they contacted the IRS, 'fessed up, was asked some questions, had some details taken down, and that was the end of it.
There’s also this story that I’ve told on the Board before, in partial answer to the part of the quote above that I’ve bolded: Harry Rolnick lived in Bangkok for years, then in Hong Kong. He used to have a column called “Letter from Bangkok” that came out once a fortnight, IIRC. Then of course, the name changed to “Letter from Hong Kong.” After something like 20 or 30 years abroad, it changed to “Letter from New York,” as he finally returned to his hometown. He said he had blown off filing during all his time away but started getting antsy when he returned that it might catch up with him. So he got all his records together and with the help of an accountant backfiled for the entire time period. Then he waited, and waited, and waited. Didn’t hear anything. Nervous, he called the IRS and asked if his case was being reviewed. The lady he was speaking with put him on hold, and when she came back, to his relief she said, in a slightly annoyed tone: “You don’t owe anything. Why are you calling?”
