Concern Rises About Prosecution Over US Expat Taxes
A recent New York Times article brought attention to some of the worries that seem to be driving Americans living overseas to renounce their US citizenship. “Almost every new tax law sows confusion and dismay, but new U.S. regulations — and much tougher enforcement — are catching some Americans in legal nets designed to snare terrorists, money-launderers or wealthy tax-evaders. Many Americans overseas — not just the rich — have had to pay thousands of dollars in fees for tax accountants or Internal Revenue Service fines.”
The IRS and Treasury Department have seen tremendous success in their attempts to encourage expats to file annual tax returns and the Report of Foreign Bank and Financial Accounts, or FBAR. In 2009, just over a quarter of a million expats filed FBARs, but by 2011, that number had increased to 618,134. Potentially stiff penalties of up to 10 years in prison and $500,000 in fines have driven many to file the FBAR for the first time, but those same penalties seem to be driving other Americans to renounce their citizenship as a way to disentangle themselves from complex laws about US expat taxes and financial reporting. In fact, eight times as many Americans renounced their US citizenship in 2011 as in 2008. The number of Americans who choose this option is still relatively low — 1,780 total last year — but the increase is notably drastic.
Results and Enforcement Numbers Seem to Speak for Themselves
Looking at recent activity, both in terms of how many expats are taking strides to become compliant and the number of IRS agents now working on overseas cases, it may be easy to understand why media outlets are focusing attention on this issue now. But try to remember that the overall effort seems to be focused on encouraging voluntary disclosure rather than on penalizing honest Americans who may not have been aware of their reporting obligations.
The IRS and Treasury Department have attempted to increase compliance by offering voluntary disclosure programs that help Americans avoid criminal prosecution and receive lesser fines if they choose to address their reporting obligations before their noncompliance is discovered. The IRS reports that 33,000 taxpayers entered the voluntary disclosure programs of 2009 and 2011; on average, it collected $133,000 per taxpayer. The current penalty is 27.5% of the highest aggregate balance in foreign bank accounts or foreign assets during the eight tax years before disclosure.
This may simply be the result of increased awareness by US expats and an increased level of diligence by the IRS. According to The New York Times, “In 2001, the agency had only 13 agents in its international operations unit, and none specifically targeting what it calls ‘global high wealth.’ By 2011, there were 71 for global high wealth — and 856 for international operations, up from 259 just a year before.”
But Is There Really Cause for Concern?
In January, IRS taxpayer advocate Nina Olson criticized the agency in a report. She specifically highlighted three areas where she felt the IRS was lacking:
- In not explaining the laws better to international payers;
- In issuing regulations so complex that compliance can be arduous and costly; and
- In issuing “potentially devastating penalties for even inadvertent noncompliance.”
In March, IRS Deputy Commissioner Steven Miller announced plans to hire an additional 300 agents. But at the same time, the IRS has also reopened its voluntary disclosure program, offering expats an opportunity to become compliant without facing the threat of criminal prosecution.
Although we at Greenback Expat Tax Services are not privy to all the cases involving US expats, in our experience there is a genuine desire by the IRS and Treasury to treat Americans who are not purposefully hiding or under-reporting assets with leniency. While we can understand people being concerned with all the attention in the press that this is garnering — and while we obviously cannot guarantee this for everyone — our experience is that honest Americans living abroad who may have accidentally misunderstood the filing requirements are not generally getting penalized.
Your US Expat Reporting and Returns
Despite current media attention, there is no need to panic. The Offshore Voluntary Disclosure Program is still in effect, limiting fines and eliminating potential criminal prosecution for those expats who seek compliance with IRS and Treasury Department regulations. If you are unsure of what to do for your own US expat taxes, Greenback Expat Tax Services offers professional, accurate, hassle-free expat tax preparation at a fair price. Our accountants and Enrolled Agents can also help you address any FBAR reporting requirements that apply to your situation. For more information, please visit our website at www.greenbacktaxservices.com.