Compliance Issues
A US Citizen living outside the United States may have US tax filing obligations if they have personal income such as wages, salary, commissions, tips, consultancy fees, pension fund, alimony, US and/or foreign social security, interest, dividends, capital gains, rental property, farm income, royalties, inheritance or payment in kind in the US or abroad.
Compliance is costly as many US citizens are unable to manage filing without the help of a professional tax preparer. Cost for this reporting can range in the thousands of dollars for a "simple" filing. Added to this are the IRS's assesment of penalties linked to tax evasion resutling in simple errors of ommission that could result in penalites beginning with $10,000 per account on an FBAR, $50,000 per account for FATCA and risk of having an errorneous tax debt assessed and risking having your US password revoked or denied renewal.
Many Americans residing overseas report banking lock-out by some foreign financial institutions that have chosen to eliminate their US-person client base in order to minimize their exposure to the Foriegn Account Tax Compliance Act (FATCA) reporting requirements, withholding fees and potential penalties. ACA advocates a "Same Country Exemption" (SCE) to alleviate the problem of "lock-out" whereby some Foreign Financial Institutions (FFIs) refuse to do business with Americans because of FATCA reporting.
FATCA form 8938 must be filed with an annual tax filing however, in addition to these filing requirements a US citizens must also file a Foriegn Bank Account Report (FBAR). Whereas FATCA form 8938 requires the reporting of only certain foriegn financial accounts, an FBAR requires the reporting of all foriegn financial accounts. The overlap in these filing requirements can be confusing and costly, in particular in terms of penalities.
General Compliance
Due to most of the world having resident-based taxation systems, many expats do not realize they have filing requirements or how to avoid being double-taxed. One of the methods to avoid being double-taxed, the foreign earned income exclusion, gives the taxpayer a false sense of simplicity. The other, foreign tax credits, is too complex for the average taxpayer (or average accountant) to get right.
With the foreign tax credit, the US expects foreign countries to tax income similarly to the US and be able to neatly disclose how much tax was paid on each “category” of income. The categories overlap significantly due to their vagueness and/or the preparer’s interpretation. More clear regulations surrounding these would be helpful.
Wealth taxes imposed by foreign countries, for example, is one tax that US taxpayers do not get credit for, but that it’s also unclear whether they are entitled to an itemized deduction for. In practice, the treatment is a coin flip based on the tax preparer/tax prep software the American abroad is using
Tax Treaties
Tax treaties vary wildly between different countries. The US/UK treaty, for example, has a very friendly recognition of each other’s retirement plans. The US/Swiss treaty, on the other hand, does not. Taxpayers will find their retirement accounts getting taxed like brokerage accounts.
More broadly speaking, the tax treaties treat all accounts and income without consistency and do so in language even tax preparers struggle to follow. The result is likely incorrect tax treaty positions taken (or incorrectly not taken) on many tax returns despite everyone's best intentions.
Entity Tax Compliance
Businesses and individuals running businesses (or freelancers) abroad can also have tax filing requirements that are costly, poorly regulated, and ultimately informational. These businesses don't have access to the foreign earned income exclusion and are therefore forced into using the more complex foreign tax credits. Oftentimes, these are in "passthrough" entities where another layer of complexity, interpretation, tax preparer, etc. is added before ultimately being reported by the taxpayer.
Complicating the issue are the filing requirements imposed by the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA moves the US from a worldwide tax system to a participation exemption system by giving US (that is, domestic) corporations a 100% dividend received deduction for dividends distributed by a controlled foreign corporation (CFC). To transition to that new system, the measure imposes a one-time deemed repatriation tax, payable over 8 years, on unremitted earnings and profits at a rate of 8 percent for illiquid assets and 15.5 percent for cash and cash equivalents. The dividends received deduction is available only to US corporations that are shareholders in a CFC. The deduction is not available to individuals, nor to foreign corporations, which, for example, are owned by US individuals, including individuals living abroad. On the other hand, the repatriation tax applies to everyone, not merely US corporations.
Accordingly a US citizen overseas, who is a shareholder in a CFC, might be subject to the repatriation tax. These businesses may be a yoga studio in France, a restaurant in Norway or a consultancy in Thailand. They can be big or small and have probably not been incorporated taking into consideration US tax law. Some of the individual who are subject to the repatriation tax might not have in hand the actual monies needed to pay this tax.
ACA continues its advocacy for the application of a de minimis ruling that would take out from the Transtion Tax and GILTI regimes small businesses run by US citizens living and working overseas. ACA writes to Treasury and IRS Click here for full article.
For more information on some of the filing forms for small businesses, see:
Return of U.S. Persons With Respect to Certain Foreign Partnerships
Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches
Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act, known as FATCA, was passed in 2010 as part of the HIRE act. FATCA requires foreign financial institutions (FFIs) such as local banks, stock brokers, hedge funds, insurance companies, trusts, etc. to report the accounts of all US citizens (living in the US and abroad), US "persons," green card holders and individuals holding certain US investments, to the IRS or to the government of the bank's country for further transmission to the US through Intergovernmental Agreements (IGAs) or be subject to a 30% withholding on their US investments.
FATCA also requires US citizens who have foreign financial assets in excess of $50,000 (higher for bona fide residents overseas – $200,000 for single filers and $400,000 for joint filers – see the IRS website for more details) to report those assets every year on a new Form 8938 to be filed with the 1040 tax return.
Many Americans residing overseas are reporting banking lock-out by some foreign financial institutions that have chosen to eliminate their US-person client base in order to minimize their exposure to FATCA reporting requirements, withholding fees and potential penalties.
ACA developed and presented to Congress, the IRS, and Treasury, in our 2015 letter, and 2016 letter, a position for a Same Country Exemption to alleviate the problem of “lock-out” whereby some Foreign Financial Institutions (FFIs) refuse to do business with Americans because of FATCA reporting requirements. Same Country Exemption would exclude the reporting of accounts owned by Americans abroad where the account is with a Foreign Financial Institution in the same country where the individual is a resident. This would alleviate the filing burden for FATCA on Americans as well as the identification and disclosure of these accounts by the Foreign Financial Institution. ACA submitted testimony to the House Subcommittee on Government Operations at its April 26th hearings ”Reviewing the Unintended Consequences of the Foreign Account Tax
For more information see:ACA's Position on FATCA and Why ACA Supports SCE.
Foreign Bank Account Report (FBAR)
In addition to the newly implemented FATCA form 8938 for financial and bank account reporting, the US Treasury requires that Americans also file a separate bank reporting form, the Foreign Bank Account Report or FBAR or FinCEN-114.
Most foreign financial accounts are reportable on form FinCEN-114; however, only certain investment and bank accounts are reportable on FATCA form 8938.
ACA advocates for the simplification in these two bank account reporting systems to reduce confusion and risk of error in filing. This is in line with recommendations by the Taxpayer Advocate to insure that the legislative goals are achieved without unduly burdening filers with double reporting.
ACA also advocates for increased vigilance by the IRS on data security for Americans abroad who are filing sensitive information on their bank account numbers, bank addresses and balances via the internet and directly through foreign bank and foreign government exchanges with the United States IRS and Treasury (IGA agreements).
US Citizens (and US persons*) who own or have signatory authority on one or more foreign bank accounts which, at any point during the year, reached an aggregate balance of over $10,000 are obliged to file a Foreign Bank Account Report (FBAR) -- form FinCEN form 114 (formally known as TD F 90-22.1) with the US Treasury Department. Individuals who qualify must file regardless of whether an individual owes US taxes.
FBAR, instituted in the 1970s, has became more actively enforced in recent years, given the attention to terrorist financing and the recent interest in combating tax evasion. The Overseas Voluntary Disclosure Programs provided a way forward for those who had willfully evaded paying taxes and had not filed FBARs, however, these programs were never intended for individuals who out of ignorance or error had not filed.
In 2014 the IRS opened the "Streamlined Filing Procedure," based on a recommended proposal by ACA, for individuals looking to come into compliance but who were not willful in their oversight for not filing FBAR.