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Archives for February 2016

Another Record-Breaking Number of U.S. Expats Renounce Citizenship

 

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Americans line up in front of the Consulate General in China

4,279 U.S. citizens renounced their U.S. citizenship in 2015. That is a 20 percent increase from 2015, which was also a record breaking year. The trend now suggests that the number will only increase from here on out.

The spike in the number is largely due to the increased reach of the United States’ citizen based tax system. The IRS imposes the reporting duty to all Americans- even the “accidental” Americans who were born in the U.S. but never lived in the U.S. With the increased scrutiny and enforcement of the overseas and banking and reporting laws, many feel that their citizenship has lost its merits.

The American expats are required to report their worldwide income on a tax return every year. They also have to report their foreign bank and financial accounts. For non-compliance, American expats can expect hefty penalties and a possible criminal charge. The Foreign Account Tax Compliance Act, also known as FATCA, in particular placed more pressure on taxpayers and foreign banks. The IRS can fine banks that refuse to disclose the information of its American clients. For instance, Swiss UBS AG was fined over $780 million by the U.S. Treasury Department for its role in “hiding” Americans’ accounts information. Fearing the consequences, some foreign banks are refusing to provide services to American clients.

Contrary to popular belief, renunciation isn’t the magical solution to all these issues. First, in order to renounce, you must pay a $2,350 fee and take a formal oath at the U.S. Embassies or consulates. Then you actually have to resolve outstanding issues with the IRS. The applicants must prove that they have properly filed and paid taxes for the past five years to renounce. In addition, if your assets are worth more than $2 million, you must pay an “exit tax.”

In conclusion, expats are renouncing their citizenship to avoid their U.S. tax obligations; however, what they must realize before making the decision is that the renunciation of the status doesn’t actually solve all the problems. It is advised that expats considering renunciation should consult with tax experts to weigh options.

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How to Avoid Receiving the IRS Penalty Notice

 

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The IRS penalty notice is never fun to receive

Each year, about 50 million penalty notices are sent out by the IRS. There are 100 million eligible taxpayers, which means, statistically speaking, one out of every two taxpayers receive a notice. The number of automated tax penalty assessments is also increasing every year, and the trend is very much true among American expat taxpayers. Statistics also show that one out of every 100 tax returns filed by ordinary American taxpayers is audited.

The United States of America is one of the very few countries to enforce citizenship-based taxation. If you are born accidentally in a US hospital with foreign parents on vacation, you would be subject to a lifetime of tax servitude. In addition, tax policies such as the FATCA and the FBAR- initially designed to catch tax evaders- are now haunting honest, hardworking Americans who have moved overseas. The IRS’ influence reaches around the globe, and it can identify and impose penalties to American expats who unknowingly “evaded” taxes for years. American expats who failed to prove their compliance with the IRS are even being rejected of the basic banking services.

Many expats who received the notice often contact the American government representatives for help. However, the overseas American embassies and consulates have rarely been proven valuable when it comes to taxation policies. Both legal and tax implications for expats are simply too complex.

So what can be done when you receive the penalty notice from the IRS stating you owe years of back taxes?

Expats could dispute the claim within 60 days, and the IRS generally is willing to listen. However, the process will likely take a substantial amount of time. If the IRS isn’t willing to forgo the penalties, one is advised to pay promptly to avoid incurring interests. If the recipient of the notice doesn’t pay the amount stated on time, the IRS would generally impose a late payment penalty of .5 percent for each month, up to a maximum of 25 percent.
What many expats don’t realize in the moment is that these systematic penalty assessments could be routinely avoided with the right guidance and help from well-equipped tax professionals. The IRS offers different programs in which the expat American taxpayers could prevent the worst tax nightmare. Do not panic at the prospect of receiving the penalty notice from the IRS, and you must resort to a legal and logical solution.

Here are your options-

1) Streamlined Filing Compliance Procedures

If a taxpayer non-willfully does not report foreign assets, he or she can submit six years of FBAR and three years of tax return under the streamlined procedure. Depending on the status, there are two streamlined procedures; one called “the streamlined procedures residing in the United States” and the other called “the streamlined procedures residing outside the United States.” For eligible U.S. taxpayers residing outside the United States, all penalties will be waived under the streamlined procedures.

Non-resident taxpayers might be better positioned than resident taxpayers to achieve their goal of a non-willful, no penalty resolution under the Streamlined Procedures. Taxpayers likely consider a Streamlined submission if they are comfortable and have sufficient factual basis to certify their “non-willful” status. If there are any uncertainties or potentially difficult factual scenarios involved, consult with experienced counsel. The purpose of seeking experienced counsel is to discover the seriousness of the situation and to be guided into the best resolution at the least overall cost.

2) The Offshore Voluntary Disclosure Program

The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. The OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.

3) Quiet Disclosure
The IRS is aware that some taxpayers have made “quiet disclosures” by filing amended returns, by filing delinquent FBARs, and paying any related tax and interest for previously unreported income from the OVDP assets without otherwise notifying the IRS. Taxpayers who have already made “quiet disclosures” are encouraged to participate in the OVDP by submitting an application, along with copies of their previously filed returns (original and amended), and all other required documents and information to the IRS’s Voluntary Disclosure Coordinator. Taxpayers are encouraged to avail themselves of the protection from criminal prosecution and the favorable penalty structure offered under the OVDP. Unlike a voluntary disclosure through the OVDP, quiet disclosures provide no protection from criminal prosecution and may lead to civil examination and the imposition of all applicable penalties

The best approach is to work with a CPA who works in close communication with a tax attorney. In some cases, the lawyer’s input can benefit immensely when the situation involves a possible settlement process or criminal procedure. Locus has both CPAs and attorneys on staff to provide the most effective tax services to expats in the potential trouble. Get in touch with us for your concerns or questions today and receive a personalized expat tax services from our experts.

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