The simple truth of the matter is that the IRS has ramped up its mission to secure taxes, penalties, and interest from anyone living overseas who is liable to pay taxes to the United States. It has been a major money maker for the U.S. Government during these lean times. In and of itself, the IRS going after U.S. Citizens living overseas who owe tax money may not seem harsh – but it is, especially in light of the way they are going about doing it.
The main problem with U.S. citizens living overseas as well as individuals living in the United States with foreign bank accounts is that the massive penalties that can be levied – upwards of 27.5% annually for failing to comply with the tax law that most people have never heard of in the first place. No warning or chance to become compliant – just a monstrous penalty for the privilege of being compliant. Moreover, recent interviews with individuals who have completed this Offshore Voluntary Disclosure Initiative (OVDI) remark on the overwhelming unreasonableness of the IRS in it’s execution of the program.
Essentially, the IRS may penalize you up to 27.5%, but for example, if the IRS believes that a stern letter would be effective in preventing future failure to pay, then the letter should suffice- without penalties. The problem is the OVDI is generating so much money for the IRS, their motivation for fairness seems to have been compromised. Really, (forgetting the professional tax cheats) if you were facing $500,000 in penalties and you received a stern warning to comply, or else – wouldn’t that be enough? At least it would be for the non-tax cheats who simply did not know about the law and thought they were properly filing their tax returns, save for the foreign tax compliance.
The IRS’ execution of the initiative is counter-intuitive, because if you were complying with all your tax requirements and simply did not know you had to disclose foreign bank accounts or the minimal interest your account may be earning – aren’t you essentially complying? Maybe the failure to know about the law would amount to mere negligence, if even that. And, if you were diligent enough to file your taxes timely, aside from the foreign tax compliance law you did not know about, wouldn’t a warning letter be enough? The IRS should start with the warning letter, not vice versa. Aren’t we all innocent until proven guilty?
To further complicate things, expats are a group are on high alert due to the recent FATCA requirements, which will mandate foreign countries who enter into IGA agreements with the U.S. to report account information to the IRS. The purpose of the law makes sense – if you think you can hide money overseas, think again. The issue though, is that people living overseas, with no intent to hide money but rather have bank accounts with overseas institutions, and are earning minimal interest for example would have to report this “income” to the U.S. Moreover, the penalty amount includes the Account amount. So, let’s say you had a $300,000 retirement account that earned $1000 worth of interest for the year. Your penalty could reach 27.5% of the total account amount, for each year you had the account for a total of years!
Imaging you are living overseas, with a retirement account just barely making interest, and just minding your own business with no ties to the U.S., other than the fact that you have not denounced your citizenship. You have now opened yourself up to annual penalties to the tune of 27.5%. Plus, with FATCA coming into play, many unsuspecting expats are going to be hit hard. To try to avoid the issue, several foreign institutions are simply closing themselves off to U.S. citizens – making living overseas nearly impossible for once motivated expats.
As provided by ACA director Jackie Bugnion: “There is no question that the IRS targeted Americans living overseas. By luring them into the OVDP in a form of entrapment then hitting them with ruinous penalties based on overseas assets. The IRS treated ordinary, hard working Americans like criminals,”
As further provided by “ACA executive director Marylouise Serrato: “Most of the unreported accounts were pension funds and basic financial accounts used for living expenses and were not being used to hide assets,” she added. The ACA wants the congressional investigation into the IRS to include the use of penalties against Americans living overseas. “Some Americans overseas are losing their life savings due to IRS targeting and this kind of discrimination must end.”
The real issue is there seems to be no vetting out tax cheats from law abiding Americans living abroad who were simply unaware of the law – a burden which for now will be shouldered by the taxpayers themselves.
S. Matthew Golding is one of only a few attorneys licensed in both New York & California, and has accumulated 15 years of legal experience, as well as experience as an Enrolled Agent (the highest credential awarded by the IRS). His domestic and international law practice emphasizes the representation of clients worldwide in matters involving Civil & Criminal Tax, Estate Planning, & Wealth Management. Matthew’s clients include U.S. and foreign citizens living abroad in countries such as Iraq, Japan, Afghanistan, Indonesia, South Africa, Pakistan, and Korea. Matthew is currently enrolled in one of the nation’s Top Master of Tax Law Programs at the University of Denver in a distance program designed for experienced professionals. He worked his way through school, graduating University of Denver and Whittier Law School and earning Dean’s List distinction at both institutions.
Member, State Bar of California, 1999-Present (Inactive 2004-2005 while launching NY practice)
Member, State Bar of New York, 2004-Present
Enrolled Agent, Federally Licensed Tax Practitioner
Admitted, United States Tax Court
Real Estate Broker, California Department of Real Estate