What is the REAL situation with the USA taxing expats?

Factual Questions
1

First I have read the relevant IRS rules and laws, I know about tax treaties, just to spare the wikipedia copy pasta :slight_smile:

In a thread in GD about Eduardo Saverin from Facebook one poster relates how there are obviously millions of US citizens living abroad all required to file income tax returns, of which the IRS receives five thousand a year. Obviously non-compliance is high, and apparently fines for this non-compliance are also very high as fifty thousand dollars each year is mentioned.

So what is the real situation here? Why haven’t I seen one story about a girl who goes to Italy and waits tables for years to get by only to return to the US with half a million in fines to pay off or whatever?Is it just that this is not as a rule enforced or what?

2

There were some articles in the papers here in Canada recently about this, warning US expats to file their taxes. Apparently the IRS is starting to crack down.

3

US expats are required to FILE income tax returns. Generally, since they are also living in some other country, they are also required to file tax returns in that country. Thus, the poor soul could wind up paying taxes in BOTH the US AND (say) the UK.

The US has tax treaties with a huge number of countries that try to alleviate this; short form: the US gives a tax credit for taxes paid to another (treaty) country. Although the expat has to FILE with the US, he/she very likely won’t owe any US taxes. Thus, it’s not surprising that the amount of tax the US gets from expats is fairly low. Most other countries have much higher tax rates than the US, so the expat is paying more taxes in the other country than she/he would in the US, and so the tax credit wipes out the US tax owed.

While I’m sure there is non-compliance, most expats are transferred abroad by companies doing business in both countries. Those business do NOT want to be hit with fines (or have their employees arrested, or get negative publicity) and so they usually pay for a tax-preparation firm to handle the tax forms (which are complicated.) Thus, I suspect that the non-compliance rate would be mostly people who are not connected with a business (e.g., retirees, students, etc.) living abroad. That’s my guess.

Credential: I did a lot of consulting with companies on how to transfer employees, and got involved in this a lot.

4

There’s also a ~$90k deduction if you live abroad for a certain amount of days per year. So if you work in Dubai, you don’t get the tax credit that C K Dexter Haven talks about since they don’t have taxes, but you can write-off the first ~$90k in income. You’re not using roads and what have you, after all.

5

I have met a number of people who hold US citizenship but don’t file. Without exception, they have lived outside the US their entire adult lives and have never filed, don’t have a Social Security number, etc. They are just quietly ignoring their US citizenship.

I always figured that once I started filing, I was on their radar, and couldn’t stop short of death or sensible ex-pat tax policy. I know which one is coming first.

I have never tried to skip filing, but I dream of doing so, as it is a right royal pain. The 1040 is horrifically complicated when you have to fill it out without a W-2, having to convert everything into US dollars and knowing it’s ultimately pointless as you don’t owe any taxes since you earned way less than $90K, and as mention have already paid more taxes to your country of residence. It’s also difficult to find an accountant willing to take on US taxes for international filers, especially if your situation is complicated by earning multiple pittances from multiple sources in multiple countries. Plus, the US doesn’t recognize my marriage, and my husband is not American and doesn’t file in the US, which means that our joint household’s joint income and expenses can’t be factored into the US taxes as they are for Canadian taxes. I do refuse to declare my foreign chequing account, though, risking the hefty fine: the rules.*

*Technically, I’m in compliance as I’ve never had a combined balance greater than $10,000, but if I ever do I’m still not declaring it. So there.

6

I believe it is the first $80k and the amount of days you have to stay out of the country is 330. I lived overseas for a number of years and was tax exempt for my first $80k.

7

Read the linked article. The US just passed a new law “getting tough” on non-filers.

The gotcha for Canadians who happen to have US citizenship too, is that they were now required to report all accounts over $10,000. (Since then changed to $200,000) An RRSP, equivalent to a US IRA account, is likely to have a lot more than that if you have been earning a decent wage for a number of years and have made a decent income.

Suddenly, people who had not lived in the USA since, say, the age of 2 realized they had 6 months to file 7 years of back taxes, even though odds are they owe no taxes. Never mind that there are very very few accountants who want to deal with joint USA-Canada tax issues especially on short notice, and certaily would cost many thousands of dollars; failure to file could earn you $100,000 in fines. Even trying to plead your case could bring you up on the IRS radar and cause you no end of grief.

Another issue was whether Canadian banks would rat you out. Many have expanded into the USA (TD Bank) and so fall under the US legal requirements to report Americans’ “off-shore accounts” like an RRSP belonging to a joint US-Canada citizen. One suggestion was to abandon a bank for a credit union that has no US presence.

Then there was the question of what happens if you cross the border. Unlike a British or Italian or Australian, it is much less likely a dual-citizen Canadian will never visit the USA. It’s pretty much the only nearby destination. Would a customs person notice the US connectoin and then look you up on the IRS system? Would you be arrested and charged with a felony if you tried to ignore the requirement to sort out your tax situation within 6 months? Would your Canadian bank impound your Canadian retirement account under orders from the IRS?

Even if you tried to renounce your American citizenship, all that would do is put you on the IRS radar and doesn’t let you off the hook for the last 7 years’ filings or large account reporting.

Remember that when the Patriot Act was passed to curb terrorism, one of the first justice department seminars was to explain to various angencies how they could apply it to their investigations of gang activity and drug trafficking. This tax law was claimed to be aimed at “fat cats” hiding assets overseas, but the real question is - if so, why was it written to hit everyone and what guarantee that there would be discretion in its application?

“Land of the Free” - YMMV.

8

For an American living overseas, filing taxes can be very simple. Or very complicated.
Just like in Kansas or New York.

The first $90.000 of salary are tax free. So for many people, living overseas means that they owe zero income tax to the IRS. So they don’t even bother to fill out the forms. (Which is illegal, of course).
But , in the past, since you didn’t owe anything, the IRS wasn’t too interested in chasing you down. So the chances were that nothing will ever happen to you.
I know dozens of Americans who have never filed for 20 years or more while living overseas.

The problem is that now for reasons of international politics, there is a new emphasis on regulations against international money laundering. The IRS requires every citizen to file not just the 1040 form and its accompanying Form 2555, but also the additional form TDF 90-22.1— in which you list the number of every bank account you have a signature on, in any country over $10,000). And (again, due to international politics, Swiss banks, etc…)the IRS is making lots of public noise about how they are going to enforce the rules.

Of course, they usually enforce the rules most strictly on people who suddenly turn out to have millions of $ stashed away. But sometimes, as they spread the net, they fish out a poor, unlucky guy who just never got around to filing because he knew for 25 years that he didn’t owe anything, (which is true), so he thought he didnt need to fill out the forms (which is very,very UN-true). And the poor guy has been quietly investing a few thousand every year into a simple retirement account, which now runs into 6 figures.

This does not make for a happy camper.

So, in the past, you’re were not likely to read a news story about a girl who went to Italy to wait tables and got into trouble with the IRS.
But as time goes on, it’s getting more and more likely…
Because, unlike any other crime on the books, there is no statute of limitations for violating IRS regulations.

(

9

They are a pain in the ass, but I have never actually paid any tax. But…the first year I retired, I discovered that no part of my pension was exempt. No problem, there is a tax treaty that is supposed to prevent double taxation. Ha! Well, the first year or two I found that the foreign tax credit line came before the alternate minimum line and I might be liable for double taxation. I had a long conversation with a guy in Puerto Rico (the place furriners had to go to for IRS information). His English was better than my Spanish, but essentially he insisted that the US could violate the tax agreement with impunity and the Canadian government would not protest. I got very creative (but barely defensible) about what part of my pension was return of capital and thereby avoided any alternate minimum tax. Then came the Bush tax cut and those two lines were reversed so that I no longer had to fret over the alternate minimum. If the tax cuts expire at the end of this year, I assume I will be back to the old forms.

But this year, something new was added. A form 8938 was added in which information about all foreign holdings was required. A royal pain. I duplicated the form in latex and filled in the info and printed them. So far, they haven’t complained. I filed it towards the end of April.

10

Nitpick: the foreign earned exclusion maximum is currently $92,900.00, not $90,000.00 ($185,800.00 for married couples).

11

This is not really correct. There are many statutes of limitations that apply to income tax returns. The catch is that many of the statutes only start ticking once you take an action like filing your return.

Also… your post continually mentions the IRS, but I think it’s important to understand that much of the blame lies with Congress. The IRS has power to interpret and extend the Internal Revenue Code, but Congress is the one passing the laws that the IRS has to enforce. (The following is opinion: I sometimes feel like the IRS is actually a buffer between us and the total stupidity of Congress.)

12

From the quoted article:

Last year was the first year that I filed FBAR, and my accountant said that the IRS isn’t really looking to fine what would be termed non-willful violations. Don’t know if that is a general rule or not.

13

It’s also not correct because there are several crimes which have no statute of limitations in most cases, such as murder.