It’s tax time in the US again as the filing deadline of April 15 is just around the corner. It takes a lot to feed the government beast and the IRS is very serious about getting all that they consider due to them. Recently the IRS was armed with a few more weapons to keep their ever-reaching thumb on US citizens, no matter where they live. In addition to the roughly 8 million Americans who live abroad many of these changes have far reaching impacts on all US citizens.
Most of these new rules and filing requirements were pitched by congress as necessary tools to “protect the citizens from terrorists, drug traffickers and money launderers”. There are some of us that suspect that these new laws and filing requirements were also designed to prevent the erosion of the tax base as more Americans look for ways to get their assets and themselves out of the US. All of this added paperwork and hoop-jumping not only impacts the drug dealers and money-launderers, but also ordinary folks like us.
Even if you live outside the United States, when you are a US citizen the IRS considers all of your income to be US income and they expect you to file US tax returns, pay US taxes, and file whatever information forms they deem necessary to keep tabs on you and to collect taxes from you. Unlike almost every other country in the world, the U.S. demands its citizens pay taxes on all foreign income. You must file even if you have lived and worked abroad for decades, and even if you’re already paying hefty taxes to the countries where you reside.
Take for example the new foreign bank account disclosure requirement they implemented in 2014-2015. Basically, if you have a bank or saving account in a foreign country that has, or ever did have $10,000 in it during the year, you must file the FBAR, Report of Foreign Bank and Financial Accounts, by June 30 each year. This applies to all US citizens whether they live offshore or not. So what’s the big deal? Penalties are the big deal. If you accidentally forget to file the FBAR form, the IRS can issue a penalty of up to $10,000 per violation. And worse yet, if you intentionally or knowlingly fail to file the FBAR the IRS can issue a penalty of up to the greater of $100,000 or 50% of the money in the account. Think about it… this is YOUR money, in YOUR bank account and the IRS can take huge penalties or even half the money because you do not file a stupid FBAR form to tell them that you have YOUR money in YOUR foreign bank account.
Don’t fall into this trap. File your FBAR form by June 30 if you meet the requirements.
Now it’s getting worse….
In an effort to fight tax evasion, the IRS recently began forcing expatriates to report not just their income, but additional information on savings and investments. These rules have made it harder to open bank and brokerage accounts overseas. For example, here in the Dominican Republic, when you now open a new bank or saving account, you actually end up filling out IRS forms informing the IRS that you have opened an account. I suspect this also results in reporting of balances or large transactions to the IRS by the Dominican bank. It is no wonder that many foreign banks are very resistant to opening new accounts for American citizens.
More ominously, the IRS and the State Department are also implementing a provision approved by Congress in December that could revoke the passports of Americans who owe too much, raising the prospect of a citizen being stranded abroad on account of poor arithmetic, sloppy bookkeeping or neglected forms.
In the typical closed-door negotiation process, the US congress slipped the new passport revocation rules into a transportation funding bill signed by President Barack Obama. This new law allows the U.S. to revoke the passport of any American whose tax debt exceeds $50,000 (including all penalties, interest and taxes).
It’s not hard to see how an expat could accidentally fall into this trap, especially if they’re late in realizing they needed to file an FBAR report or tax return in the first place. As mentioned above, the fines for failing to report bank accounts are outrageously high. If the government enforces this in the most stringent way possible, it could be devastating for US citizens who live or travel overseas. Think “Snowden”. The weapon the US used to limit the free movement of Snowden across borders was simply to revoke his US passport. Whether you accept or hate what Snowden did in disclosing NSA secrets, you have to agree that revoking someone’s passport can have rather serious ramifications. If ever there was a case for having a backup 2nd passport, this new law might be the one.
At least some rational members of Congress are waking up to the fact that revoking a person’s passport offhand without warning could be devastating. Hopefully they will curb the over zealous implementation of this latest attack on taxpayers by the IRS and State Department. But where this will end up is still in the air. The IRS argues that its efforts to squeeze offshore taxpayers has been profitable, with a recent offshore voluntary disclosure program allowed them to collected more than $8 billion since 2009.
Many Americans who live abroad simply don’t know they need to file, and the IRS lacks an efficient way to notify them. Nobody sends you a memo when you go overseas.
Don’t forget to file your FBAR before June 30 if you are required to.
Unfortunately living in a tropical paradise does not eliminate the need to keep up with what the long-arm of the IRS is up to.