Published On: Wed, Jan 15th, 2014

Are you aware of the full extent of your tax reporting obligations as an Expat?

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In her 2013 annual report on the IRS, released last week, Nina Olson, the US national taxpayer advocate, said offshore voluntary disclosure schemes in use since 2009 have “burdened ‘benign actors’ who inadvertently violated the rules”.

The disclosure programmes have been “punitive, charging average penalties of more than double the unpaid tax and interest associated with the unreported accounts”, Olson added, in her wide-ranging report on the IRS’s performance.

Those individuals who decided not to go ahead with a disclosure (that is, those who “opted out”) were automatically audited, and thus penalised  for coming forward, and “on average assessed penalties  against  them of nearly 70% of the unpaid tax and interest”, Olson said.

“Thus, while those who opt out generally face smaller penalties than those inside the offshore voluntary disclosure (OVD) programmes, they still face very significant ones.

“For those who remained in the 2009 programme, the median offshore penalty applied to those with the smallest accounts (ie, those in the 10th percentile with accounts of $87,145 or less) was disproportionate – nearly six times the median unpaid tax.

“Among unrepresented taxpayers with small accounts it was even more disproportionate – nearly eight times the unpaid tax. It was also disproportionately greater than the median penalty paid by those with the largest accounts (ie, those in the 90th percentile with accounts of more than $4.2m), who paid about three times the unpaid tax.”

Olson’s comments on the OVD programmes appear on pages 228 through 237 of the document, in the “Most Serious Problems” section.

The national taxpayer advocate’s Annual Report to Congress, delivered each year in January, includes a summary of the most serious problems encountered by taxpayers, legislative and administrative recommendations for solving those problems, and an examination of the year’s most frequently-litigated issues.

Confirms criticisms

Olson’s criticisms echo those of many US tax experts, American expatriate advocacy groups – such as the American Citizens Abroad – who have long called attention to what they say has been the IRS’s surprisingly harsh treatment of some American expatriates, who were genuinely unaware of the full extent of their tax reporting obligations.

In 2011, the US launched a new amnesty programme, called the Offshore Voluntary Disclosure Initiative, which included a provision for so-called “accidental Americans” – individuals who became American under unconventional circumstances, oftentimes unaware that they were even US citizens.

But even this attempt to be more fair was criticised, as one tax expert told International Adviser at the time, for being “so narrowly drawn” that it would  help only “a handful of them”.

The Internal Revenue Service has been too hard on those Americans who have come forward in recent years to disclose their unreported overseas bank accounts‚ according to a Congressionally-appointed watchdog.


Few submitting FBARs, many renouncing

Olson’s report comes as major mainstream media organisations have begun focusing on the problems being faced by American expatriates. A growing number have been renouncing their citizenships each year, as the hassles of being an American overseas multiply.

In her report, Olson notes that in 2012 the IRS only received 807,040 FBAR (foreign bank account report) sumissions, even though “7.6 million US citizens reside abroad, and many more US residents have FBAR-filing requirements”.

This, she noted, revealed how that the IRS “has likely failed to address significant information reporting non-compliance”.

“The national taxpayer advocate has offered many common-sense recommendations that would bring taxpayers into compliance, and help restore confidence in the IRS, but IRS has not fully adopted them,” Olson said.

Olson was appointed to the position of national taxpayer advocate in January 2001.  Her annual report to Congress is one of two reports the NTA is required by statute to deliver each year, and outlines the most serious problems facing the taxpayer.

According to the NTA’s website, dozens of her recommendations for change have been introduced as legislation in Congress since 2001, and fifteen have been enacted.


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