An advocate organization for U.S. citizens abroad is urging major changes in tax policy to encourage more individuals to pay taxes.
The organization is American Citizens Abroad, which sent a lengthy and technical letter to ranking officials of the U.S. Internal Revenue Service.
Basically, the letter says that many Americans abroad are avoiding their obligations to the U.S. tax collector out of ignorance of the law, fear of the consequences or the complexities of the process.
For example, U.S. taxpayers or even citizens abroad who owe no taxes, can be assessed a 27.5 percent penalty on all overseas assets if they have not filed certain required documents. One of these is a report of a foreign bank account.
American Citizens Abroad says that the Internal Revenue Service should make a distinction between U.S. citizens living abroad and those still in the United States who seek to invest money abroad.
“The number of Americans resident overseas is generally estimated to range from 5 to 7 million although the actual number is not known with any degree of accuracy either by the Department of State or by the Department of the Treasury,” said the organization in the letter. “Based on data available, the number of tax filers is estimated at around one million, leaving 2 to 3 million non-filers. Recent voluntary disclosure programs instituted by the IRS have barely made a dent in the non-compliance group. Hence the need for a program that will truly induce overseas Americans to enter into compliance and straighten out their tax situation with the IRS!”
In years past the Internal Revenue Service would send agents overseas to help U.S. citizens comply with their tax obligations. At least in Costa Rica, an agent might be present for one or two days a year at the U.S. Embassy. At other times, the embassy workers tell citizen to check out the IRS Web site.
American Citizens Abroad is recommending a new compliance program for overseas Americans.
Among other aspects, the program would not require reporting by Americans of bank accounts in which they only have signing authority and are not beneficiaries of the account, the organization said.
The program would be open to Americans who have lived overseas for at least three years and who have failed to file either a tax return or a document disclosing their interest in a foreign bank account, the Report of Foreign Bank and Financial Accounts, also known as FBAR.
The key point of the proposal is that Americans would be able to pay the taxes they owe and interest but not be assessed a penalty. unless the IRS discovers them. Persons who lived overseas all their life or from age 16 would not be subject to a penalty, according to the proposal.
American Citizens Abroad has long promoted a residency-based U.S. tax system instead of a citizenship-based system. The United States is among only a few nations that tax their citizens no matter where they are making their money. The new proposal does not address that point and seeks to work within the current tax system.