Wednesday, July 11, 2012

IRS offers reprieve to expatriate tax filers (sort of)

This could have been a huge announcement: IRS offers reprieve to expatriate tax filers. In fact, I think it's a very positive step, but there are some issues.

Tax Return - 1040
Photo by 401(K) 2012 (
For those who haven't been following along here's what's going on.

If you move from California to New York, you may have failed to notice something that didn't happen. Specifically, California does not come after you for income taxes for the rest of your life. Why not? Well, why are taxes collected? Taxes are collected to offset the costs the government incurs for providing you services. If you're forced to pay money to a government and receive nothing in return, this is called paying tribute, not paying taxes. In my case, I've lived in Texas, Louisiana, Washington (state), Oregon, Hawaii and Alaska. If all of those states were to chase after me for taxes, I'd go bankrupt just paying for the tax preparation, not to mention the taxes.

I have also lived in Japan, the UK, the Netherlands and now France. Can you imagine if I had to pay taxes to five countries and six US states? This would completely shut down large portions of the world economy as people would be incapable of leaving their home countries and multinational businesses would suffer greatly.

This is why countries tax people resident in their countries. Residents receive the services, expats do not. Except that there are two countries that do tax their expats: the dictatorship of Eritrea and the United States.

Except that even with the USA, there's an interesting problem: we expats were never told of this. In fact, it wasn't until the last issuance of our passports that there was even a mention (in small print at the back) that we were liable for them. Having lived abroad for years, I've been in US consulates several times and I was never told of this legal obligation, nor had I ever seen notices to this effect. Surveys that I've read and numerous news articles reinforce this point: We simply had no idea that, with the exception of the Eritrea, the US is the only nation that taxes their citizens abroad (actually, they try to tax foreign nationals too, but that's another post).

Lately there's been a lot of talk about taxation and many expats are finally learning that they're subject to them. Fortunately, I already knew about this and I file my taxes with Expatriate Tax Returns, but not everyone has been so lucky as to know about the issue.

Please note that I am not a lawyer or accountant, so do not consider any of the following to be legal advice!

That's where the IRS "reprieve" comes in. Basically, if you didn't know about your tax obligations, you can "come clean" if you file your past three years of taxes and past six years of missing FBARs (Foreign Bank Account Reporting). From the IRS publication:
While more details will be forthcoming, taxpayers utilizing the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years.  All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission.  For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions.  Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.
To qualify as low risk, if you owed $1,500 or less for each of the three years, you should be fine. Except ... (emphasis mine):
In general, the risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income. Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be presented in the submission, will be released prior to the effective date of the new procedure.
Hello! Thank you for being vague. What is "sophisticated tax planning"? And what does "the amount and type of US source income" mean? This procedure goes into effect September 1st, so if you're delinquent on your taxes, you've probably already missed the deadline for this year (unless you have an approved extension), so do not file your taxes before September 1st! (Again, contact a lawyer or tax preparer first! Do not trust my advice).

I think this is a very welcome move by the IRS, but to date they've made it clear that they don't really care that no one was told about the laws they're enforcing, the  IRS has reneged on previous promises to fix the situation and they've been terrifying 70 year old grandmothers. If you're going to accept the IRS's offer, be very careful.


  1. Absolutely brilliant post. You did a fine job of explaining the situation and why is absolutely sucks to be an American abroad these days having to deal with the US gov. The new IRS rules are a slight improvement but still, in my view, not nearly enough. There needs to be some sort of campaign to educate Americans about these obligations - I meet a fair number of new arrivals in Paris and the vast majority still have no clue about any of this. As for the long-term residents, word about what happened with the previous OVDI programs where the IRS seriously misled people and started zapping retirees and working people outside the US with draconian fines for non-compliance has created an atmosphere where trust is non-existent right now. Something must come from the highest levels of the US government before people will stick their necks out and come forward. Homelanders have no idea how serious this is - we are talking about people in a complete panic for their families, their retirements and fearing financial ruin. I don't know if you've heard this interview with the head of ACA but it's a good one to pass on as well. Very clear explanation of the situation

    1. I don't think it's likely we're going to get intervention from the highest levels because "sticking up for the expats" is a rather unpopular move in the polls.

  2. Good point. Ah well, I live in hope :-) Did you see this article as well (retweeted by Eric). Some very sensible suggestions for how to resolve the FBAR/FATCA issue

  3. I am a US Citizen living in England. I've lived here for the last 35 years since I was 7 years old. I left the US when I was 2 in 1972 with my mother who is English, moved the to UK, then to South Africa but back to the UK in 1977. I have not lived in the US since. I have never worked in the US or for a US employer at all although I have been there on business trips for my then UK employeer and I have visited a couple of times on holiday. I have never receieved any benefit or support from the US in my entire life.

    I was educated in England, lived nearly my entire life here and have always worked and paid my taxes here. I am married to an English woman and have 3 English children who are now all over 18 but I am currently going through a divorce.

    I was actualy researching resources for US Citizens tonight, wondering if I could use US airbase resources like shops etc... as I remember in the 1980's you could use Greenham Airbase. Whilst searching I started seeing these posts relating to US Taxes and suddenly my heart started pounding. Could I be liable for something I had no knowledge of? I've never had any communication from the US even though they have my UK address. I have renewed my US passport in London since I was a child and never been told anything about this. I assumed since I pay tax and live in the UK that was it, I had never even considered or thought I would need to pay taxes to the US, I just didn't know anything about it.

    Now I am confused, from what I am reading I apparently should be sending some tax forms to the US every year? What am I paying for? What exactly is the US going to give me back in return for sending them money? I don't live there, I don't use the US roads, social services, banking system, medical system etc... As a US Citizen am I entitled to anything from the US? A Pension? other benefits? I just have no idea at all.

    Now I'm getting divorced and I will have to sell the family home I will I hope get some money from that to start my new life but am I going to have to pay the US taxes on that money to? Really?

    Very confused and very worried...

    1. Chris, I'm very sorry, but you're going to have to contact an attorney. If what you say is correct, you're in an unfortunate situation that many Americans have faced. Yes, you will owe taxes to the US. Yes, you're still required to file them. Also, if at any point you have ever had a total of more than $10,000 US in your bank accounts and you've failed to file an FBAR with the US Treasure department, you're liable for 5% to 25% of your bank account's max value.

      Now we have a form 8938 that also has to be filed (similar to an FBAR, but this goes to the IRS) which also has steep penalties if you have not filed.

      As for selling the family home, I expect that this would be considered "capital gains" and thus will not fall under the FEIE (Foreign Earned Income Exemption) and is thus liable for full tax.

      You need to contact a qualified tax attorney (not just an accountant) to see what can be done. I've been rather impressed with Andrew Mitchel LLC. He has a great international tax blog and he appears to be rather sympathetic and knowledgeable about our problems. Of course, I don't know him directly, so I can't say this is a recommendation.

      There is one important question: did you receive British citizenship at birth? If you did, there may be a way out of this if you want to renounce your US citizenship. If you received British citizenship at birth and you are still a citizen of the UK, you're exempted from the exit tax provision (there's more to it than this, but you appear to have covered the other bases above.

      Also, if you want to email me directly at the email address I list at the top of every page, I'd be happy to answer more questions.

  4. Thanks, not the news I really wanted to hear but I guess I need to do a lot more research. I can't believe I have never had any communication from the US about this. How on earth can they justify taxing people who have never lived in the country? Land of the free? Really? I have always been proud to say I had a US passport but this has made me really very angry.

    1. Chris, like hundreds of thousands, perhaps millions of people, you are going to go through a severely tough time, I feel for you.
      In my case I had to spend 40,000$ to tax lawyers to regularize my situation and I am a housewife, never worked in US, and have never had any US income.
      Even if the IRS decides not to confiscate your entire life savings, the compliance costs will cause pain and difficulty for your entire family.
      You will probably be forced to line up at the embassy and renounce your birth citizenship like many of us... but you can only do that after you have spent hours of stress and work not to mention thousands of dollars getting your reporting up to date.
      Have a look on American Citizens Abroad organizations website they have very good resources links to articles etc.
      Also the Isaac Brock Society website, a bit more dramatic but full of good info.
      Welcome to the club and I wish you courage and strength for the months to come.

  5. Do you vote in the US? When was the last time you were counted in the US Census? Article 1 Section 2 of the US Constitution requires the House of Representatives to be proportionally constituted according to a mandatory decennial census. If you are not counted, Congress should have no authority over you.

    1. Anonymous, regardless of whether or not this is true, it won't help. The US Census already refuses to count Americans abroad, but clearly we are still taxed. The courts usually take a very, very dim view of anyone trying to challenge US tax law.

  6. I have never voted full stop. I have little knowledge of US policies, US consitution etc.. and don't feel qualified to vote for any party when I do not live in the country nor understand the workings of that country. I am a US Citizen by birth but for all intents and purposes I have been raised as an English Citizen. My mother never took out British Citizenship for me as she felt later in life I might want the option to go live in the USA. She died 3 years ago from lung cancer unfortunately so I can't find out anymore than that.

    As far as I am aware I have never been included in a US census since the last time I was in the country as any kind of resident was aged 2 in 1972!

    1. Chris, check out British nationality law. The British recognize jus sanguinis (right of the blood), which means that having a British mother should automatically make you a British citizen.

      I would talk to a British lawyer and explain the situation. If you can claim British citizenship and get a statement from the UK government stating that, due to jus sanguinus, you had that citizenship from birth, and if you're willing to renounce your US citizenship, you may be able to escape these taxes.

  7. Makes me sad because in the last year I had started thinking about a possibility of moving to the US in a few years time when my divorce is all settled. Giving up my passport would mean losing the chance to ever live in the US. OK, it's a big world, there are plenty of countries out there, I lived in South Africa as a kid for a bit but I would hate to lose that possibility although the consequence is that I might get stung for a load of tax or fines. I don't think my salary will have exceeded the limit they set of 92,900 or whatever the current value is, nor has it. But I have had money sat in a bank account for a while which was monery from a remortgage and was eventually used to improve house and pay debts etc... The UK already taxed me on that whilst it sat there!

    My kids are now paranoid that there father might get deported to the US! Could that happen? Could I get charged?

    This is like a nightmare coming true.

    1. Chris,

      I'm sorry to hear this too. If you can claim the tax amnesty, you might be OK. However, I would strongly talk to a tax advisor about your situation. If you're selling the house, that's a lot of money which might get taxed. I don't know enough the the US/UK tax treaty to know if you have any protection there.

      And no, you won't get deported to the US over this. There's been some discussion about not renewing the passports or Americans with delinquent taxes, or even confiscating them, but that's not happened yet.

    2. Yet.

      Chris, I am in the exact same situation as you, except in a different Country in Europe. It has destroyed my life. I´m sorry to say that you are in deeper shit than most because you kept your US citizenship. I did too, for the same reasons, and now I can´t get rid of it, simply because I cannot afford lawyers, accountants etc to become compliant.
      I´m incredibily angry and feel totally betrayed and it has destroyed everything for me and taken my life.

    3. fuck me who would want to be a septic!! always knew the u.s is shit maybe you can all try shoting the shit out of it!! britains never never will be slaves!!