In early April, the House of Representatives passed a bill that would re-design the Internal Revenue Service (IRS). It had a nifty and promising title, the “Taxpayer First Act of 2019”. Despite its sweet title, part of the bill would prohibit the IRS from providing taxpayers with free tax preparation software. The for-profit tax preparation industry must be jumping for joy.
Frankly, I do not see this being an issue that will impact most American taxpayers living and working overseas. I cannot imagine the IRS free-file system would be feasible for many US persons abroad. DIY software is not meeting the requirements of many overseas Americans — not unless the individual has the most simple situation without foreign investments of any kind. As the penalties can be so severe for improper reporting of foreign income/ assets, the smart American living abroad, will not take the risks associated with using a free file software.
I know that many expatriates prepare their own tax returns using Turbo Tax or similar software. However, it is not uncommon to see numerous mistakes due to the complexity of the tax law in general and especially with regard to the international provisions. Taxpayers are not aware of certain provisions that may apply to them and from what I have seen, the software is not picking up on all the nuances. In fact, many tax return preparers in this area also fall short of the mark. The depth of understanding required in the international tax area mandates years and years (yes, literally) of practice.
This recent Congressional action however, prompted my thoughts on a closely related area. Both demonstrate how the US Government is shirking its responsibility to taxpayers.
Shouldn’t Tax Filing Be Made Easy?
First, I believe the US Government has a responsibility to assist its citizens and residents in understanding and meeting their US tax obligations. (In fact many countries provide free tax filing services.) The recent action by the House, falls far short. It is disappointing that this initiative is being blocked. I believe, it’s all in the name of politics given the robust lobbying efforts of Turbo Tax and other tax preparation titans such as H&R Block.
Putting the issue of dirty politics aside, I have not seen the US doing what it should do in this regard overall. I provide another example – how many individuals become green card holders or US citizens without any idea of their US tax obligations for non-US assets/income? Many in this group will indeed have offshore assets or income, yet are never told of their obligations to report and pay tax to the US IRS.
Meet the Clueless: Naturalized Citizens and Green Card Holders
The test for US citizenship will ask the most banal questions – “Name one of the longest rivers in the United States”; and “What happened at the Constitutional Convention?” Questions about the 1880’s, the US Holidays, the Colonial Period and US geography are there, but nothing clues them in about the US tax system. No one involved in the governmental process tells the person getting a green card or naturalizing to become a citizen about the worldwide tax system the US has in place. I have not seen any attempt to make sure the individual has an understanding of his tax obligations before citizenship or a green card is granted. The US should get with the program!
In my practice, I see that green card holders and naturalized citizens who live overseas, are just now learning that aside from a duty to pay US taxes on income earned outside of America when one is not resident there, complicated and confusing tax information reporting obligations are required for their “foreign” assets. Most have never heard about the duty to file so-called FBARs which can result in harsh imposition of penalties if not done properly or in a timely fashion. The cost for professional tax advice and for tax return preparation can be very high when international tax issues are involved, as is often the case for both US citizens and green card holders who reside abroad or have overseas interests. The complexity is daunting for such individuals who, once they have left the US and moved abroad, often returning to live in the country of origin and pay taxes there, often mistakenly (but reasonably) believe that their US tax obligations have been terminated.
For many of my clients holding green cards, it comes as a rude awakening that even though the individual has not been complying with the terms of maintaining the green card for purposes of the US immigration laws, continuing to hold the card keeps the individual on the hook for annual US income taxes and reporting obligations. Many are under the mistaken belief that simply because their green cards have “expired” they are no longer US tax subjects. This is incorrect. The tax law is very precise on this topic: once “resident” status is acquired, it is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned. A full discussion of this topic can be found here.
Ignorance is (Not) Bliss
Sadly, it is often the case that such individuals learn the nitty gritty tax information many years after they have left the USA and moved abroad. Many come to me in a state of severe panic over their many years of inadvertent tax noncompliance. It is usually at the same time that they learn of the problems associated with having made US-tax deadly foreign investments (such as investing in a non-US mutual fund or foreign “life insurance” product).
In addressing the underlying problems of tax noncompliance borne of such ignorance, it makes sense that educating taxpayers about these duties could achieve a great deal. Educating all individuals who wish to obtain a green card or become naturalized citizens should be part of the processing procedures for obtaining US permanent resident status or US citizenship.
An initiative to educate is ever more critical now that US persons abroad are right on the front line – their US passports can be revoked or issuance denied if they have seriously delinquent tax debt. See my blog post here on this topic.
I understand that the recent bill is now being more fully scrutinized in Congress, thanks to taxpayer interest groups raising the alarm. Let’s hope Congress wakes up!
Posted April 14, 2019 (tomorrow is D-Day… tax returns due!!)
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