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Top myths of US tax compliance for Foreign Accountholders

There is a lot of misinformation so we decided to debunk the top myths of US tax compliance.

Myth #1: I don’t have to file US taxes if I live abroad.

The US is one of the few countries who employs citizen-based taxation, so no matter where you live, you must file a US tax return if you meet the minimum thresholds.

Myth #2: I will have to pay taxes.

Most expatriates do owe tax to the US when they file. The US has put deductions, exclusions and credits in place to help prevent dual-taxation, including the Foreign Earned Income Exclusion. With this, you can exclude up to $100,800 of foreign income from US taxation when you qualify via one of two residency tests. Most expats qualify via the Physical Presence test, which requires you to be inside a foreign country for 330 of any 365-day period. Other credits, such as the Foreign Tax Credit, are also available to offset US tax due.

Myth #3: I’ll be forced to pay major penalties.

This is false.  The Offshore Voluntary Disclosure Program has major penalties. However, the IRS has modified one of its amnesty programs, the Streamlined Offshore Filing Procedures, to eliminate late filing and FBAR (Foreign Bank Account Report) penalties. Under the Streamlined Foreign Offshore Filing Procedures, you simply file the past three years’ tax returns and last six years’ FBARs and no penalties apply.  You must also persuasively certify that your lack of filing was non-willful (which can be sometimes tricky).

Myth #4: The IRS can’t find me because I live abroad.

The IRS has a new way to pursue tax dodgers. The most well-known part of this effort is FATCA, the Foreign Account Tax Compliance Act. Under FATCA, US taxpayers are required to report the value of foreign financial assets if they exceed certain thresholds.

The controversial piece of FATCA is that foreign financial institutions are now required to report on the assets of their American clients. Basically, if the IRS chooses to investigate you, your banking activities overseas will be an open book.

Myth #5: I’ll just renounce my citizenship and be done with taxes!

When you begin the process to renounce your citizenship, you must file Form 8843, which certifies that you have been compliant on your US tax filings for the past 5 years.  So before the renunciation can be approved, you’ll need to file your delinquent returns (possibly explore the under the Streamlined Offshore Filing Procedures). While this program only requires you to file the last three years’ returns, the IRS will accept that as your good faith effort to become fully compliant and your request will be granted.

Myth #5: FATCA is a tax.

FATCA is not a tax. FATCA does not focus on income, tax rates, or tax liability. FATCA seeks to identify U.S. investors with foreign financial interests, making it easier for the IRS to audit income and assets that could otherwise remain hidden offshore. FATCA accomplishes this objective by compelling the aid of “withholding agents,” defined under FATCA as any U.S. or foreign persons having control, receipt, custody, disposal, or payment of a cross-border item. Once a withholding agent has an obligation to make a qualifying cross-border payment, the agent must obtain information from the foreign payee, regarding significant financial involvement the payee has with U.S. taxpayers.

Myth #6: FATCA will generate a backlash from foreign governments who view this as an overreach of U.S. law.

False.  Initially, FATCA did create a backlash from foreign governments, but almost all nations have signed to FATCA.

Myth #7: There is no action required now.

False. Now is the time to act. We expect unabated aggressive enforcement of the U.S. tax laws, including increased criminal prosecutions and civil investigations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets, particularly if people are “involuntarily discovered” via FATCA.