For those who can't afford the luxury of IRS compliance, you are not alone
We've talked to thousands of US expats who considered using the Streamlined Discloure Programs. Some have hired us. But not all. And while the "Foreign" Streamlined Program has the advantage of having no penalty associated with it (compared the program for US taxpayers living in the US which has a 5% penalty), there are a large amount of taxpayers who say "no thanks!"
Because we tell them how much our fees are going to be.
And our fees are high because the work is intricate and the stakes are high.
And it is not only our legal and tax preparation fees which can exceed $10,000 for US expats who work for themselves through some sort of foreign corporation or limited liability entity, but it is also a commitment of time. In order to keep costs as low as possible, sometimes our clients spend 40-80 hours or even more getting all the documents and books we need to make a proper submission.
So too, is the case of our most recent guest, Julio, an entrepreneur located somewhere in South America. He is aware of universal tax jurisdiction, FBAR filing requirements, and the various forms he needs in order to be in 100% compliance.
Julio agrees with our position — no disclosure is better than an imperfect disclosure – thus won't submit something he knows not to be solid.
Why? Once in the tax system, it is incredibly easy for the IRS to assess a taxpayer not just FBAR penalties, but also penalties for technically incorrect:
- Form 5471, which is required for many business overseas
- Form 8938 required when foreign financial assets exceed $100,000 for single filer and $200,000 for married filers (figures are half that for US taxpayers living in the US)
- Form 3520-A require for many foreign pensions in which the taxpayer contributes more than the employer or is self-employed.
Each one of these forms, if incorrectly filed or unfiled has a $10,000 penalty. Per year. That is $30,000 per year. and multiple years can be assessed. And the IRS is not exactly nice about mitigating penalites via reasonable cause. And just because there is no tax due, that is NOT a defense, and this brings up the next point.
One of the greatest ironies is that once everything is properly filed, because of the foreign tax credit or foreign income exclusions, our clients will pay us thousands of dollars to create an ultimate tax bill of exactly zero dollars.
Zero. Once done with all the hoops and headaches, they do not owe the US Treasury one cent.
Doe this make sense? What is Congress doing?
Julio then goes on to explain that these compliance costs his competitors, based in the UK, Australia, Germany and everywhere else in the world, do not have. They don’t have to deal with the cost or the energy sink of these backwards compliance rules.
Once you know how the world really works, it is difficult to argue against the proposition that the US tax code is making Americans everywhere less competitive. The recently reformed tax code didn't go far enough. It still needs serious help.
And the other problem – does a lay person know they hired someone who is any good?
We take over cases all the time — and unfortunately, based on the dumpster fires we have seen, we know Julio is right his next point. Julio states that it is difficult to find tax professionals everywhere. In the country in where he lives, it seems like half of tax professional do not know what they are doing, and it seems the other half are intentionally engaging in something criminal.
While this is perhaps an exaggeration, nonetheless like while it is very difficult for a US taxpayer to determine which US tax accountants and attorneys are competent and which ones are not. Yet having a bad tax lawyer or CPA is not an automatic excuse. The IRS could punish you for something you had no clue was wrong.
Territorial Taxation for Individuals would be a great start
One fix would be for the IRS to move to a residency-based taxation system. Something the rest of the world does. This would even the playing field and not put American entrepreneurs around the world at a huge disadvantage.
If you can afford the luxury of making a Streamlined Disclosure, please contact us for a confidential dicussion about your concerns.