Confusion and Complexity Faces Overseas Taxpayers

January 2012

 

 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)Foreign Earned Income Exclusion Concerns for Contractors in Iraq and Afghanistan—The IRS recently issued Memorandum Number AM2009-0003 regarding the availability of the FEIE to contractors working in Iraq and Afghanistan.  It is clear from the Memorandum (find it on the IRS website, www.irs.gov) that the IRS will be lookng closely at contractors who claim to meet the bona fide residence test, but still have a family and home in the US and travel there often on leave.  There may even be problems for those claiming the physical presence test.  For the most part, there is not a lot of case law on the subject, and the IRS rules and legislative history leave a lot of room for interpretation. However, contractors should understand the rules may have changed, and they may have to defend their claim to the FEIE.

(3)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, 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.  Some taxpayers who entered the Voluntary Compliance Program offered several years ago are paying large penalties based on the highest account balance and often incurring significant legal fees for failing to file an information form they were not even aware they were required to file.  Taxpayers who inadvertently failed to file this form need to consult a tax professional with experience in this area for advice on how to proceed.

(4)More Reporting Required Under Form 8938—The Foreign Account Tax Compliance Act of 2009 will require even more reporting by taxpayers and also attempts to impose reporting requirements on foreign financial institutions.  Form 8938, Statement of Foreign Financial Assets, is another reporting form that requires information on all foreign holdings if the total value exceeds certain amounts (depending on filing status and if you live in the US or overseas) and this form must be attached to the tax return itself.  This form is in addition to the FBAR and comes with its own set of penalties. The form and instructions have now been issued (find them at www.irs.gov),  and this form will be required to be attached to 2011 tax returns.  There has been a significant outcry against the sweeping and punitive nature of this form.  An in-depth analysis of the implications of the IRS requiring details on foreign assets was written by American Citizens Abroad (www.aca.ch) and can be obtained by contacting them.  In addition, a  letter was sent from the office of Bruno American Tax Services to the IRS last year expressing concerns about the intrusive nature of this legislation and the forms that have been generated as a result.