Barron's International Tax Service

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IRS To Pursue American Expatriates

As the world increasingly contracts into a commercial neighborhood, U.S. citizens residing abroad and foreign nationals are being freshly targeted by the Internal Revenue Service.  A U.S. citizen regardless of foreign residence is obliged to report world-wide income to the Service.  A foreign national is either a lawful permanent resident due to green card status or else due to substantial presence (183 days) on American soil.  Such foreign nationals are under the same obligation to report their world-wide income as U.S. citizens.  A non-resident alien, also defined by IRS as a foreign national, is anyone who is not a U.S. citizen and does not reside in the United States.  But a non-resident alien is required to report and pay taxes to IRS on U.S. source (not world-wide) income.

 At a time when the fiscal responsibilities of the American government require more tax revenues, the Internal Revenue Service has employed 300 auditors (soon to be 400) trained in international tax compliance.  According to the Fall issue of TaxPro Journal (Paula Singer writing for the National Association of Tax Professionals), in a recent interview, Marti Sartipi, International Policy Program Manager for IRS, stated that the initiatives of the Service will include:  1) automating processes to identity non-filers, 2) auditing 10,000 tax returns of U.S. citizens and foreign nationals with international issues, and 3) imposing penalties for failure to submit required disclosure documents.  Foreign nationals can also lose immigration benefits such as the right to work in the United States and right to U.S. citizenship.

Disclosure documents include but are not limited to Form TD F 90.22-1 – Report of Foreign Bank and Financial Accounts; Form 3520 – Report of Transactions Involving Foreign Trusts; Form 5471 – Report of U.S. Shareholders of Foreign Corporations; Form 8621 – Report U.S. Shareholders of Passive Foreign Investment Company; Form 8833 – Report of Income Tax Treaty Claims; and Form 8865 – Report of Transactions with Controlled Foreign Partnerships. 

Civil penalties apply to anyone who does not file a disclosure document.  Examples of such penalties are $500 for a negligent violation, $10,000 for a non-willful violation, $50,000 for consistent negligence, $100,000 for willful failure.  Other penalties can apply for the following:  1) filing the wrong tax return, 2) claiming the wrong filing status, 3) under-reporting of income, 4) claiming incorrect personal exemptions, 5) incorrectly claiming a tax treaty benefit, 6) claiming improper expense deductions, 7) excluding taxable capital gains stock as a non-resident alien, 8) failing to file a tax return, 9) failing to file a state income tax return.

 IRS has also announced that the Service intends to audit accounts payable transactions with foreign venders, including foreign national payees.  The focus of these audits is to include fees for personal services as well as royalty and license fees in order to identify foreign national non-filers as well as non-resident employees who should be on payrolls.  Companies to be particularly scrutinized are pharmaceuticals, publishing, high tech, law and accounting firms, and the entertainment industry.      

 Tax filing is complex.  Filers easily make mistakes in filling out tax forms where the instructions are not always clear.  Non-filers may not be convinced that they have a filing requirement.  U.S. citizens do not always report foreign earned income that is taxed abroad.  And foreign nationals are often unaware of special rules applying to them.  But these are the kinds of situations that will have the highest exposure rate as the taxman invades once impregnable strongholds of tax avoidance and under-reporting.