IRS Eases Rules to Eliminate Many Penalties for Expats on Foreign Income

IRS: I Want More - by KAZ Vorpal on Flickr, used unchanged - 819x1024

On 18 June 2014 the IRS announced BIG changes to some of its programs for the reporting and taxation of foreign assets owned by some Americans. These changes should come as welcome relief to many expats who failed to properly report and pay tax on foreign assets, if such failure was "due to non-willful conduct." In other words, these taxpayers did not understand their filing requirements in the past, so they neglected to file required returns, not because they were willfully trying to avoid reporting and paying required taxes. And now they want to clean up this non-willful non-compliance and get all returns properly filed and taxes paid. In such cases, the IRS is now willing to make it much easier for them to bring all their tax filings into compliance with the law.

Streamlined Filing Compliance Procedures

There is now a new streamlined procedure for such people to follow, which includes some very big incentives for these taxpayers to now catch up their filings.

  • There are many more taxpayers who can now qualify for this new program, including Americans living in the US, not just those living abroad.

  • Under the previous program, only taxpayers who owed $1,500 or less in tax could participate in the program. This limit has been eliminated as a requirement. If otherwise qualified, all taxpayers can now participate, regardless of how much they owe in taxes.

  • And here is the BIG incentive for taxpayers who can participate in this new program. For American expats living abroad, all penalties will be waived. For Americans living in the US, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets at issue. In the past, penalties on these kinds of cases could pile up quickly and could eventually add up to more than the back taxes owed. This could save some taxpayers a very large sum of money.

Americans Renouncing Their Citizenship

Perhaps this will stem the tide of American expats renouncing their American citizenship.

  • Listen to this interview from August 2013 about the sharp rise in Americans renouncing their citizenship. She reveals that the average cost for expats living abroad to get even simple US income tax returns prepared is $4,000 to $5,000 annually. That's to get someone to prepare the returns and does NOT include any tax they might owe.

  • She doesn't give any specifics on what she considers to be a "simple return," or how she arrived at such an average figure. I have been preparing US income tax returns for thirty years, with thousands of accurate returns prepared, filed and accepted by the IRS. I can count on one hand the number of returns I have prepared in those years that cost the taxpayer $4,000 to $5,000 in my fees. And those few returns were definitely NOT simple returns by anyone's standard. They were all complicated and required many hours of preparation time.

  • So if her assertion is accurate, my conclusion is that preparing returns for expats is such a specialized market, that the expats have few qualified preparers to do their returns and those few preparers, knowing the scarcity of such professional expertise, are willing to charge the expats very high fees!

  • It pains me to think that people who grew up in America and are good, hard working people might have ended up living oversees and then found themselves not being able to afford to get their US tax returns prepared. But apparently that is the case for some. In 2013, there were about 3,000 Americans who renounced their citizenship, when the average before that was 500 people per year. Now much of this rise is due to a side effect of previous IRS attempts to collect taxes from expats living abroad, which has caused many banks outside the US to not be willing to open banks accounts for Americans. Can you imagine the hassle of living outside the US and not being able to open a bank account in the country where you live and work?! Read the stories of five American expats who are struggling with this question of whether to renounce their American citizenship. This is a nasty unintended consequence of IRS attempts to get tax money out of American expats living abroad. I am hoping that these new IRS changes reflect an awareness on the part of the IRS that they have created a monster, and perhaps this is the first step in their setting things right for expats.

The Fine Print

  • Of course with all things on US taxes, there are a lot of details. The changes were released on 18 June 2014. Here is one article written for the accounting industry that explains the changes in some detail, including some changes that I did not mention in my writing above.

  • I usually prefer to get it direct from the horse's mouth, in this case by reading the IRS website on the matter. In this case there are three pages to be read to get it all. First there is one page that gives the beginning outline of the changes they were announcing. And then there are two more pages of changes after that, one for American expats living outside the US and the other for US taxpayers living in the US. It is the two pages after the beginning outline that discuss the lifting of the penalties for those who participate in the program.

  • I suggest that you read them with no distractions nearby, taking your time to go slowly. These pages are not light reading.

Tax Help

If you would like me to help you with your own US taxes, in this area or any other, send me an email. Click on my name, then on "Email Me" on the page that come up. I won't charge you $4,000 to $5,000.

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By Ron Chester, Thursday, June 19, 2014 at 9:10 PM. Pay no attention to the man behind the curtain.