IRS ramps up new compliance campaigns
By Eric Scali, JD, LLM – H&R Block Expat Tax Services
The IRS is continuing the push to bring taxpayers living abroad back into compliance. While in the past the primary focus was bringing more Americans living overseas back into filing compliance, a recent announcement by the IRS is also adding to that scrutiny by making sure those returns are filed accurately.
IRS Compliance Programs
With the recent announcement, there will be a larger focus on making sure returns that claim either the foreign earned income exclusion or foreign tax credit are prepared correctly. As part of the 2nd wave of compliance campaigns launched by the IRS's Large Business and International department, the IRS has specifically pinpointed these two benefits to dedicate more attention and resources to. The main emphasis will be looking to whether taxpayers who claim the exclusion qualify for it, and making sure the foreign tax credit amount is not overstated. With an already amplified lens on taxpayers that live abroad, these new campaigns are sure to increase the level of IRS correspondence for Americans overseas.
To give you a better sense of the IRS's past international examination scope, in 2014 the IRS sent 855,000 notices and letters to the roughly 7.5 million US citizens living abroad. Although not every one of these letters resulted in additional tax and penalties, it shows that a high percentage of Americans living abroad are having to address issues with their returns after filing it. Another possible contributor for these notices is a push from the IRS to have taxpayers get in compliance with their foreign income and account reporting requirements.
In addition to the IRS taking over enforcing compliance of the FBAR in the mid 2000's, in 2010 Congress passed the Foreign Account Tax Compliance Act (FATCA), which requires all foreign financial institutions to report accounts of US citizens or face a mandatory 30% withholding tax on certain US sourced payments made to them. The law also paved the way for the US government to sign information sharing agreements with governments of more than 100 foreign countries, forcing the hand of financial institutions to comply with the law. These agreements allow the IRS to obtain details about US accountholders from foreign financial institutions, and vice versa.
With these programs in place along with the use of data analysis, the IRS now more than ever has the available means to make sure Americans living abroad are up to date with all their filing requirements, and to make sure that their filings are prepared correctly.
How to Stay Off the IRS's Radar
The obvious way to stay off the IRS's radar is to file your return and FBAR accurately, and on time. That is sometimes easier said than done, however, because not everyone knows what they may be missing when filing a return on their own.
There are varying levels of intricacies with the rules associated with claiming the foreign earned income exclusion, the foreign tax credit and other international IRS forms that someone who is a DIY'er may not be aware of. You would need to sift through an extensive set of rules with a fine-tooth comb to figure out every possible complexity. Additionally, the added complications of owning foreign based investment and retirement plans (including ISA's) is one of the main issues that is skipped over by self-filers. Missing these rules can increase the potential for you receiving one of those dreaded IRS letters.
If you are unsure of what needs to be included on your return, or how a certain asset or investment is treated from the US side, it is best to get expert help to guide you through the details. You will want to make sure that whomever that may be has a good grasp on US international tax concepts, and an understanding of your local country's tax and financial make-up. Getting it done right the first time may save you a lot of hassle and headache down the road.