Being a US person and living overseas isn’t a crime (even though it may sometimes feel like it)
Expatriates, more commonly known as expats, are US citizens residing overseas. That part at least is simple. How the US tax code treats these citizens is where everything devolves into chaos. It’s not uncommon for US expats to feel like they’re being penalized for choosing to live somewhere other than the US, and we can’t really blame them for feeling that way.
There are over 8 million US citizens living abroad. Most have been presented with opportunities in other countries and aren’t trying to “escape” the US as much as they are trying to capitalize on opportunity. And, even if they were trying to avoid US taxes, they’d quickly find that they were out of luck as their worldwide income becomes taxable to the IRS! So much for “out of sight, out of mind.”
What about the Bank Secrecy Act?
Here’s a quick history lesson for you. Originally, the program was created to catch international criminals by allowing the feds to peek in on their financial accounts. However, it also generated a mandatory requirement for any US taxpayer with an aggregate balance of $10,000 or more in any accounts held outside of the US to annually file a Report of Foreign Bank and Financial Accounts (an FBAR). Anyone not filing their FBAR — based on the initial construction of the act — is considered to be one of the bad guys.
Now you may be thinking, “Hey I’m not a bad guy!” And even though you’re 100% correct, you still have the report the accounts or you will be labeled as one of the bad guys by default. Because clearly if you don’t remember/know/decide to file an FBAR, you are trying to cheat the government. It couldn’t be one of a million other factors, could it?
Many people, both those living in the US and expats living abroad, don’t disclose their foreign accounts like they should. Some of the most common reasons are as follows:
- The taxpayer simply did not know that they were supposed to report their foreign accounts;
- The taxpayer assumed since they, had multiple accounts that were all under $10,000, they didn’t have to report each individual account. Bear in mind that the $10,000 minimum is the total combined value of all accounts;
- The taxpayer is living overseas, and may not think of their accounts as all that foreign! They think, “Well I live in Bangladesh, and all of my accounts are held in Bangladesh, so no, they’re not foreign;” and
- They had someone else prepare their tax returns and that person was either not aware of the requirement to disclose foreign accounts or made an error in reporting; expats can have very complicated returns.
90% of our offshore clients have not willfully tried to avoid anything. And yet, through one — or a combination — of the above, they find themselves in a very frightening situation with very real consequences.
If you failed to disclose, don’t panic
If you failed to disclose your foreign financial accounts for any of the reasons that we’ve gone over, don’t panic! Not only are there options, but there is also a pretty decent program for expats.
Voluntary disclosure programs were created to entice people that have not met their tax and reporting obligations to “come clean.” There are some variations and we have written a number of articles about which program to aim for, when to enter, how to apply, etc.. With some of these programs, you can avoid the majority of penalties altogether. So, if you find yourself stressed about what’s happening, take a deep breath. There are options.
For many people who failed to disclose their foreign accounts, getting into the “Streamlined Foreign Offshore Procedures” is going to be the goal. If you meet certain criteria, you could be eligible for the streamlined program and avoid unnecessary penalties. For this program, the IRS will go back and look at three years of returns and you’ll only be responsible for paying the back taxes.
Compared to a full OVDP program, which will go back eight years and have penalties up to 27.5%, the streamlined program can be a lifesaver.
Even if you are unable to pay the streamlined’s three years of back taxes in full, you may still be able to use the program. Also, at that point, it’s not a bad idea to look at the feasibility and possible benefits of an offer in compromise. While being able to pay off the back taxes in full is going to be a much smoother route, not having the funds available to do so doesn’t rule out the streamlined program as a way of possibly fixing your tax problem. It’s important — as with all dealings with the IRS — to hope for the best, but to be prepared for anything. Things tend to get really messy when the IRS gets involved.
Take a deep breath
Dealing with the IRS can be stressful. And, if you’ve just recently learned about your obligation to disclose your foreign accounts, there can be a lot going on in your head. Know that it’s normal to feel overwhelmed and scared. That being said, don’t hide from reality. It’s important to take a deep breath and then start working towards a solution.
Don’t hesitate to contact us if you have any questions or need some guidance trying to find the right strategy for you. Help is always available, so don’t feel like you need to go through this alone. Every situation, no matter the circumstances, can be made better. That doesn’t mean that everything will just vanish into thin air and you can waltz away happily. But it does mean that things can be infinitely better than they are and you can get on with your life again. Taking immediate action is the key to dissolving stress and regaining hold of your future.