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The Taxman Cometh for US Expats

Faced with a bowl of acronym soup and account closures at some local banks, a half-day tax seminar for US expats, organized by AmCham Belgium’s Legal & Taxation Committee on June 17, drew an attentive and engaged crowd.

Mark Rayner, US Tax Team Leader at PwC, began the seminar with a comprehensive overview of tax compliance issues for US expats. US citizens and permanent residents (i.e. green card holders), no matter where they live in the world, have a reporting requirement. Although overseas taxpayers represent less than 1% of all US taxpayers, they represent a significant source of ‘lost’ tax revenue for the US Government due to foreign tax credits and other exemptions. It is estimated “less than 20% of non-US reportable [financial] accounts are actually being reported,” according to Carolina Anon of Deloitte. The tough new rules and regulations targeting this non-compliance are causing many US expats to come out of the woodwork.

Matching records: FBAR and FATCA

Separately and apart from their income tax returns, US taxpayers are required to disclose their foreign bank accounts to the US Government, if at any point during the previous calendar year the aggregate balance across all of their foreign accounts exceeded $10,000. In this case, the taxpayer must file a Foreign Bank Account Record (FBAR) by June 30. As of 2014, the FBAR form is known as FinCen 114 (formerly TD F 90.22-1) and must be submitted electronically.

But how can the US Government verify the accuracy of the information submitted on this form? Enter FATCA, the Foreign Account Tax Compliance Act.

“The purpose of FATCA is to identify all US taxpayers who do not declare their income to the IRS,” explained Geneviève Colot of PwC. It was passed into law in 2010 as part of the HIRE Act and enters into force on July 1, 2014. While FBAR is an obligation on the individual, FATCA is an obligation on foreign financial institutions (e.g. banks). Under FATCA, foreign financial institutions are asked to search their client records for a number of indicia to identify US taxpayers, and then disclose this information either directly to the US Government or to their national authorities who will then pass it on to the US Government. The latter will be the case in Belgium. (For more about the Intergovernmental Agreement between Belgium and the US, please consult the June 2014 issue of AmCham Connect.)

With FATCA then, the US Government has both pieces of the puzzle. In the future, the government will be able to match records from FBAR and FATCA and thereby identify taxpayers who are not in compliance.

Getting back on the straight and narrow

For many US expats who may not have been aware of their reporting requirements or who thought they could slip by under the radar in the past, these new rules have come as a rude awakening. The US Internal Revenue Service (IRS) has created the Offshore Voluntary Disclosure Program to encourage these individuals to come into compliance, but they still risk substantial penalties. Decisions cannot be appealed, so individuals are well-advised to study the possible outcomes before applying for the program. According to one audience member at the seminar, the recently appointed Head of the IRS recognizes this program has been “too harsh on inadvertent non-compliers” and change is coming in the near future.

Expatriation: The nuclear option

Faced with increasing reporting requirements, more and more US expats are considering the radical option of expatriation. The number of individuals renouncing their US citizenship increased by 1176% between 2008 and 2013, from 235 to 2,999, and is on track to reach 4,000 this year. According to Jonathan Davis, an immigration lawyer with Fragomen, the burden of reporting on working income is one of the common reasons why individuals choose to expatriate. Expatriation is not a simple means of shirking tax obligations, however. US citizens must be in compliance with their US tax requirements before they are allowed to renounce their citizenship.

Death and taxes

As if to make the point that there is no escaping death and taxes, the seminar concluded with a presentation by Marc Quaghebeur about estate planning for expats in Belgium. The taxman cometh, especially after death.