US expats are fast becoming the world’s financial outcasts as Foreign Account Tax Compliance Act (FATCA) and other tax laws begin to bite.
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Around 7 million Americans live outside the USA, but in a tax measure that is out of step with most of the rest of the world, the US is one of only two governments that taxes non-residents on their earnings and chargeable gains.
Generous tax breaks may leave large sums of income exempt, but these exemptions do not generally mean US expats do not have to report their earnings and investment proceeds on tax returns.
And this unwitting tax trap is becoming a lucrative loophole for the Internal Revenue Service (IRS) to exploit.
The problem for US expats who fail to report their tax affairs back home is the US government has become the world leader in seeking out and enforcing compliance against them.
FBAR and FATCA
What happens is US expats should report their foreign earnings and investments on a FBAR form filed with their tax return.
The IRS then crosschecks this information against FATCA data supplied from overseas financial institutions.
If there is a discrepancy, a tax inquiry is launched to get to the bottom of the matter.
The problem is many foreign financial institutions have made a policy decision not to deal with US clients because of the compliance costs of FATCA.
In a bid to become tax compliant, Americans are rushing to the IRS to confess their past misdemeanours.
330 day rule
The tax authority says more than 50,000 taxpayers have taken advantage of the offshore voluntary disclosure program – and handed over $7 billion in lost taxes from earlier years.
Not only are FATCA and FBARs causing US expats a tax headache, but trying to work out if they really are expats is also an issue.
IRS rules are explicit about who are expats for tax purposes – basically they must live in another country for at least 330 days of the previous 12 consecutive months.
That’s OK for permanent residents who spend a year or more elsewhere, but can lead to problems for international workers who spend some time overseas and the rest back in the USA.
Keeping track of entries and exits to the USA over 365 day periods is becoming a spreadsheet exercise for American expats in their spare time.
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