U.S. taxpayers living overseas and some U.S. residents with foreign bank accounts are getting a better deal from the Internal Revenue Service.
The tax-collecting agency says it will give a break to Americans living abroad who have failed to file their taxes and go a little easier than usual on those living in the U.S. with secret foreign bank accounts — if both groups can show they did not evade U.S. taxes on purpose.
The IRS said expatriate Americans can avoid some penalties by filing three years of back taxes and convincing officials the failure to pay taxes was not deliberate.
An expat advocate organization, the Association of Americans Resident Overseas, said the IRS was recognizing that there is a large population of Americans living abroad who have been afraid to become compliant and honor mandatory tax and financial asset reporting requirements imposed by the agency.
The IRS also noted that starting Tuesday, which is July 1, a new information reporting regime resulting from the Foreign Account Tax Compliance Act will go into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons, it added.
The changes are related to existing offshore voluntary compliance programs and are anticipated to provide thousands of people a new avenue to come into compliance with their U.S. tax obligations, said the IRS in a summary.
“The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed,” said IRS Commissioner John Koskinen. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”
The current offshore voluntary disclosure program was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and 2009, said the IRS.
Since the launch of the first program, more than 45,000 taxpayers have come into compliance voluntarily, paying about $6.5 billion in taxes, interest and penalties, it added.
The tax situation exists because the United States is one of a few countries that taxes its citizens on whatever money they make anywhere in the world. This is called citizenship-based taxation.
Expat advocates, such as the Association of Americans Resident Overseas, have been lobbying for a residency-based system in which only income earned in the United States would be taxed. The organization says that the current system makes U.S. workers and firms less competitive overseas.
The original procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a questionnaire, the IRS noted.
The expanded procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. The IRS said that the changes include:
• Eliminating a requirement that the taxpayer has $1,500 or less of unpaid tax per year;
• Eliminating the required questionnaire, and
• Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.
For eligible U.S. taxpayers living outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the penalty is 5 percent of the foreign financial assets that gave rise to the tax compliance issue, the agency said.
Expats are likely to require professional help. For example, there are some situations in which the IRS will assess a penalty of from 27.5 to 50 percent of the overseas asset. This happens if it becomes public that the taxpayer’s overseas financial institution is under investigation by the IRS or the Department of Justice.
At least all major Costa Rica financial institutions will be providing information to the IRS under the Foreign Account Tax Compliance Act. Otherwise the institutions will face significant penalties imposed on the transfer of funds. This is the hated FATCA that has caused some institutions to reject U.S. customers.