U.S. tax system based on citizenship and residency set to punish unsuspecting taxpayers
For anyone who thought the Internal Revenue Service (IRS) wasn’t serious about tracking down errant or missing U.S. taxpayers, the past year should have erased any doubts. Whether you agree with the IRS’s methods or not, they now have even more tools to find U.S. citizens living just about anywhere. If you need to file U.S. taxes, the time to ignore your filing obligations seems to be rapidly coming to an end.
The IRS is not letting this drop. Nor can you expect any other government intervention to eliminate your U.S. tax filing obligations. The IRS expects everyone who needs to be compliant to file the paperwork even if they don’t actually owe any U.S. tax.
The IRS introduced the Streamlined Filing Procedure in 2012 because it recognized that there were people who simply did not realize they had U.S. filing obligations while living abroad but they needed an opportunity to catch up without fearing bankruptcy. The program is remarkable because it offers compliance with no penalties for people who are able to use it. In the U.S. tax system, penalties can be quite substantial and far more than the taxes actually owed.
There was never a deadline attached to the Streamlined Filing program but it was not expected to be open indefinitely. And this was confirmed at a speech by the IRS commissioner in December last year when he said at some point they will assume people have had enough notice that they should have become voluntarily compliant. When the IRS is making these kinds of statements publicly, you can expect a deadline to be announced soon.
After much debate and a court case to try and stop it, the Foreign Account Tax Compliance Act (FATCA) came into effect in 2015 and the first information share between the Canada Revenue Agency and the IRS happened in September. FATCA allows the review of information from financial institutions to identify U.S. citizens living abroad who may not be tax compliant.
While FATCA may be a tool for the IRS to find tax cheats, it is having unexpected consequences whether U.S. citizens are tax compliant or not. For example, some U.S. citizens living abroad are unable to get mortgages because the bank does not want to deal with FATCA requirements. Others are finding they cannot open bank accounts for the same reason.
If FATCA wasn’t enough, new legislation was introduced in December that now gives the IRS powers connected to U.S. passports. When the announcement came out, it was easy to dismiss because the new law allows passports to be revoked if you owe $50,000 or more in taxes.
It seems unlikely that the average taxpayer would owe that much. But the fines in the U.S. tax system can add up quickly. For example, if you have a Tax Free Savings Account (TFSA), you are required to file two forms a year with the IRS to report this income. It is not tax-free in the U.S. Not filing the appropriate forms results in a $10,000 fine per form. So if you haven’t filed your U.S. tax returns in a couple of years, you are quickly looking at a sizable tax bill and you might not be able to enter the U.S.
And it is more than just taxes owing. If you hold a U.S. passport but do not have a Social Security Number (SSN), it can now be revoked or not renewed. Once you have a SSN, the IRS can track you to make sure you are filing taxes.
All of these moves by the IRS mean the window of amnesty is closing. Unless you are living in a remote area with little connection to the rest of the world, you will not be able to plead ignorance when the IRS asks you why you haven’t filed.
If you choose to wait until the IRS contacts you, it will be much harder to get penalties waived. And once the Streamlined Program closes, getting yourself into compliance will become more expensive. With the new legislation and tools at its disposal, the IRS is starting the next stage of its crackdown on non-filing U.S. citizens. The time to procrastinate is over.
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