Confusion and Complexity Faces Overseas Taxpayers

August 2009

 

 I have never been in favor of headlines that use fear and sensationalism to attract readers.  BUT, in this case, the language above is both warranted and timely.  In my over twenty years working with US taxpayers overseas, I have never seen such a lot of confusing and onerous rules and regulations issuing from the IRS and the Treasury Department.  The following is a brief and not necessarily inclusive list of issues that unwary taxpayer abroad may face:

 

(1)Enforcement of Filing U.S. Federal Returns—Many Americans abroad seem unaware of their responsibility to file a U.S. tax return if they have income over the threshold of their personal exemptions and standard deduction.  The IRS is looking for that reporting of foreign income—even if tax isn’t owed—and is now working to share information with entry officials at airports and other places of entry into the U.S. to make sure a tax return has been filed by valid U.S. passport holders.

(2)Higher Marginal Tax Rate—Several years ago the Bush Administration pushed through legislation that requires foreign income and housing expense that are excluded from tax to be included for purposes of determining the marginal rate on other taxable income.  This means if a taxpayer has investment or other income (such as spousal income that is not available for the foreign income exclusion), it will be taxed at a much higher rate than before this law was enacted.

(3)   Reporting of Foreign Corporation or Partnership—This is another complex set of forms that can catch a taxpayer unawares.  If you formed a foreign company to conduct business overseas (be it a corporation or a partnership), you are required to file each year, with your personal tax return, a lengthy form reporting a lot of information about that organization—the amount depends on what percentage of interest you hold in the organization and several other factors.  The forms to take a look at are Form 5471, Information Return of U.S. Persons with Respect to Foreign Corporations, and Form 8865,Return of U. S. Persons with Respect to Certain Foreign Partnerships.

(4)Severe Penalties for Not Filing FBAR—The FBAR or Report of Foreign Bank and Financial Accounts has been required for many years of those taxpayers with over $10,000 in foreign bank or other accounts.  However, recently the Obama Administration concluded there are many Americans hiding money in overseas accounts and decided it could generate tax revenue by enforcing the penalty provisions for not filing this form (TDF 90-22.1). It is important to realize that the penalties can be significant—even if the failure to file this form was unintentional.  Moreover, on October 27, 2009, the Foreign Account Tax Compliance Act of 2009 was introduced into both the House of Representatives and the Senate.  If passed, this legislation would require even more reporting by taxpayers and also attempts to impose reporting requirements on foreign financial institutions.  There has been a significant outcry against the sweeping and punitive nature of these measures. A letter was sent from the office of Bruno American Tax Services to the IRS expressing concerns about this matter.