Despite the fact that the United States has reciprocal tax treaties with numerous countries, U.S. citizens living in them (expats) must also file tax returns with the U.S. Internal Revenue Service (IRS), even though they may not have any taxes to pay.
Unfortunately, almost 60 per cent of the estimated 6 – 7 million U.S. citizens living abroad are not aware of this requirement, says Pesach Woznica, president of Expat Tax CPA‘s.
“What they don’t realize, is that they could face stiff fines from the IRS for not filing.”
Mr. Woznica says his firm, which is well versed in the tax treaties between the U.S. and numerous foreign countries, has been assisting expats living in countries such as Canada, Israel, the UK, France, Italy and Australia for many years in filing their IRS returns.
“Many expats think that because they already paid taxes in the country where they reside, they don’t have to file. Part of the reason is that many accountants they use in these countries are not familiar with U.S. law,” he adds.
FAMILIAR WITH FOREIGN TAX LAW
Similarly, many use U.S.-based CPA’s, he says. “However, most of them are not familiar with the various foreign tax laws — frequently resulting in their clients overpaying the IRS, when they may not have had to pay at all.”
At a minimum, all U.S. citizens that earn an annual income of more than $10,000 (or just $400 for self employed) must file a 1040 form to the IRS, even if they don’t owe any taxes.
They must also report on their financial accounts – such as bank accounts under the Foreign Account Tax Compliance Act and file a form 8938. Failure to do so can result in a fine of up to $10,000. If you receive a notice from the IRS and still fail to file, the penalty goes up to $50,000.
Mr. Woznica points out the U.S. and many countries such as Canada, share taxpayer information. In addition, Canadian banks also pass information on their U.S. account holders to the IRS. There are about 1 million U.S. citizens living in Canada. This practice is happening in other countries.
Also of note, if one has at least $10,000 in one or more bank accounts at any time during the year, they must file the Foreign Bank Account Report (FBAR) form 1116.
COMMON PROBLEMS
“One common problem that expats experience is to make sure that they file their U.S. tax return on time. In many countries, the deadline for filing is at an entirely different time then the U.S. In Canada, for example, the tax day for individual filing is April 30th.”
Another problem “is that many expats file their general 1040 return, not realizing they also have to file the FBAR and FACTA forms.”
Mr. Woznica stresses that even in situations where expats have not filed, the IRS has instituted a streamlined program for late filing that currently doesn’t penalize the expat.
Additionally, many foreign banks around the globe have entered into agreements with the Unites States government where they are now required by law to report their U.S. clientele. As a result, the U.S. citizen is therefore exposed.
PROGRAM COULD BE SCRAPPED
He says, expats should take advantage of this program as soon as possible.
“There is a strong possibility that Steve Mnuchin, President Trump’s new Treasury secretary, is planning to go after both corporations and individuals who have offshore bank and other investment accounts that have not been reported. These are worth billions of dollars in tax revenues.”
This, in turn, could trigger the IRS to change gears and shift towards enforcement in a serious way.
In other words, expats need to act now and get caught up to date without penalties, Woznica urges.
For further information on US expat tax issues, contact Pesach Woznica
Phone:
Canada (416)-800-1915
USA (646)-892-9915
UK (442)-031-501896
ISRAEL (077)-228-5371
Email: pesach@expattaxcpas.com
