The Taxpayer Advocate Service (TAS) recently released its 2022 report to Congress. In one portion of the Report (listed in “Most Serious Problems Encountered by Taxpayers” #10 OVERSEAS TAXPAYERS: Taxpayers Outside of the United States Face Significant Barriers to Meeting Their U.S. Tax Obligations) TAS provided a succinct review of the problems faced by American taxpayers living abroad. I summarize some of the issues, below, but anyone reading this post likely has already read about them many times before, and likely experienced them first hand.
This is really old news. Why are we still hearing about the problems but not seeing any solutions? It’s time for Congress and the Internal Revenue Service (IRS) to walk the talk. In practice, I am not seeing improvement even though these serious problems have been noted and recognized time and again before. Am I being cynical? Tax pro’s – let’s hear from you.
I also believe things will become far worse for the American abroad, as the US Treasury has now told foreign financial institutions and their governments that they must “encourage” and “enforce” FATCA.
Nothing is Done
Despite the approximate 9 million US citizens who live abroad as well as green card holders who live overseas, not nearly enough has been done by the IRS or by Congress to address the problems faced by this distinct group of taxpayers. The Report acknowledges that overseas taxpayers face numerous barriers to their ability to meet their US tax obligations. The problem starts with the extremely complicated laws to which they are subject (PFIC, CFC, foreign trust reporting rules, anyone?). Some of the rules are oblivious to the real-world problems faced by Americans abroad (for example, statutorily mandated response times to a notice of deficiency ignore the reality of mailing delays that occur in foreign countries).
Problems are made worse because this group has far less support and fewer tax resources than taxpayers living stateside. Even though the IRS has acknowledged these problems in the Taxpayer First Act Report to Congress, this group of taxpayers remains less able to access IRS services by phone, online, or in person; their e-file rates are significantly lower; and there is a limited availability of tax products in languages other than English which hampers their ability to understand their complicated tax duties. Loads of work still needs to be done.
The Report noted that as of 2015, the IRS had closed its last four overseas tax attaché offices, in London, Frankfurt, Paris, and Beijing. But it’s not just the IRS that has failed overseas Americans. The US Embassies and Consulates can do more to help this group. I offered my time to the US Consulate in Dubai to hold free seminars for Americans so they could understand their tax obligations. The Consulate politely refused saying it did not want to be viewed as “promoting” a particular tax advisor! Seriously? You say WHAT?
Changes Take Time…. but This is Ridiculous
I understand that changes take time… but years have gone by and we are still waiting.
What disturbs me most is that despite the acknowledged complexities faced by this group of taxpayers, we have seen time and again that the IRS has been ruthless in assessing penalties when overseas taxpayers have not properly complied with their tax obligations. This problem is especially manifest when it comes to foreign information reporting. Automatic assessment of penalties is apparently a problem with Form 5471 (ownership in foreign corporations) and Form 3520 (foreign trusts) even if the taxpayer is using the IRS Delinquent International Information Return Submission Procedures (DISP). The statement of reasonable cause required as part of the DISP may not be read, penalties are automatically imposed and taxpayers face an uphill and costly battle to prove their case.
When taxpayers miss their Bank Secrecy Act obligations, egregious FBAR penalty assessments continue to come to light in the court cases (you may remember the USD5.1 million FBAR penalty for mere signature authority or the sad case of the Greek housewife being assessed a USD4.75 million FBAR penalty). Now we have another case involving “willful” FBAR penalties for mere signature authority over 2 foreign accounts, each with values not exceeding USD65,000. And the IRS assessed FBAR penalty against the dual national taxpayer with signature authority? USD200,000 per year for the FBAR violations, representing USD100,000 per account! I will blog on this case soon.
Surely the IRS can improve its response in such instances. Is it a matter of IRS personnel not being properly trained when working with overseas taxpayers or is it simply a case of raking in the maximum penalty amounts? Either way, this is a shameful reflection on addressing the tax problems plaguing the American overseas.
Head’s Up — It Will Only Get Worse
FATCA enforcement is ramping up, not down. You can read all about it at attorney John Richardson’s recent post.
John and I have an interesting and entertaining podcast on today’s blog post. Have a listen here.
Posted January 19, 2023
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