By David McKeegan
Summary: Although it has always been a requirement to file a tax return for all Americans living outside of the US each year, many American expats until now have justified not filing with the belief that the IRS has no way of "finding" them and knowing that they are living abroad/earning income abroad. This has all changed with the HIRE Act.
From our 30+ years of experience with American expat taxes, we have found that failing to file US tax returns for a number of years is actually quite a common situation. With the excitement of a move abroad, coupled with all the changes that such a move brings, the last thing on most people's minds is filing their taxes. While living in the US, Americans are inundated with H&R Block and Turbotax commercials, but if you are living peacefully outside of the US, it is easy for the deadline to inadvertently pass you by. So, American expats who are behind on their US taxes are definitely not a new situation. What is new, however, is how much scrutiny the IRS is beginning to place on Americans who live abroad, and how much effort is going into ensuring tax compliance.
Although it has always been a requirement to file a tax return for all Americans living outside of the US each year, many American expats until now have justified not filing with the belief that the IRS has no way of "finding" them and knowing that they are living abroad/earning income abroad. This has all changed with the HIRE Act.
What is the HIRE Act?
The main purpose of the HIRE (Hiring Incentives to Restore Employment) Act, signed into law on March 18 2010, is to stimulate jobs growth by providing payroll tax breaks and incentives to businesses to hire unemployed workers. So, what does this have to do with Americans abroad? To help pay for the costs of the HIRE Act, there have been a number of provisions introduced which mean that Americans who live abroad will face even more scrutiny. The HIRE Act demands that international financial institutions (i.e. banks, brokerage houses, wealth management firms, etc) disclose to the IRS which of their clients are US citizens with accounts with over $50,000 in them. Non-compliance by banks will be costly: banks that do not agree to report these customers are subject to a 30% withholding tax on their US assets.
How does the HIRE Act affect American expats?
The HIRE Act can affect you in a number of ways, but the two main ones are: 1) Your overseas bank may decide that US citizens are too burdensome to deal with and close down your account (this is happening with many Swiss banks and more UK banks are starting to do this as well) AND 2) if you have not been filing your US tax return, the IRS will now know that you exist and that they have no record of you, meaning you are not up to date with your tax filings.
So, if you haven't filed your US taxes, what does this mean for you? First off, many countries have dual taxation treaties with the US that will minimize the tax that you owe if you live and pay taxes abroad. For example, if you live in Europe, tax rates in Europe tend to be higher than those in the US, which would mean that you are unlikely to owe any money to the US Treasury. The sticking point, however, could be the Foreign Bank Account Report (FBAR), which the Treasury requires you to file each year disclosing overseas bank accounts with over $10,000 in them. If you fail to file this form and the Treasury chooses to enforce the fine, there is a minimum penalty of $10,000, and this fine can increase depending on how much money you have not reported. At this stage it is unclear how the Treasury will apply these fines, but this could be very costly to people who have not kept up with their US Tax Filings.
Our advice: If you have fallen behind on your US tax obligations and in reporting your foreign assets, the time to come clean is now! You should start the process of catching up on your tax returns immediately. The IRS will usually require tax returns for the past 6 years as a start, and they may require more if you owe money. You will also need to file the Foreign Bank Account Report (FBAR) for this period as well and attach a letter explaining why you have not previously filed this form.
You should also be aware that financial institutions you have been working with for years may no longer want your business. Many boutique firms are deciding that US Expats are not worth the time and effort required to comply with US regulations and are closing out their accounts. Fortunately, others are popping up to specialize in this now niche area, so you should be able to find a new money manager without too much difficulty, but there is still the hassle of switching to contend with.
There are many additional potential implications of the HIRE Act, such as decreased foreign investment in the US, but for American Expats the key point now is that the time is right to enlist an experienced expat tax accountant get your affairs in order to avoid any negative implications in the future.
First Published: Nov 30, 2010