Living abroad for most of us is the adventure of a lifetime. We are exposed to so many new experiences and our senses are constantly invigorated by events that are interesting, delightful and unexpected. For most, it is the stuff of dreams. For some unfortunate individuals, netfile though, the dream turns dark quickly when, seemingly from out of nowhere, they find they are ‘out of compliance’ with the Internal Revenue Service back in the United States because they have not remained current with the legally required filing of their US income taxes
Why does the United States bother spending time and resources going after tax-delinquents? In short, because it’s worth it. Every year the US spends around $5 billion in enforcement activity, including discovery, auditing, collections and prosecutions that yields $55 billion in additional tax revenue. Clearly it is in their financial best interest to do so and it’s about to get a lot easier for the US government to find, assess and prosecute Americans living abroad who are behind on filing their US income taxes.
There are new laws, just enacted, that give the United States a crystal-clear picture of whom among Americans living abroad are not filing, what they’re worth and where they reside. The days of living ‘off the grid’ are waning and a new era of finely focused enforcement is upon us.
Through FBAR (Foreign Bank Account Report) and FATCA (Foreign Asset Tax Compliance Act) laws now in force you, and even more notably all foreign financial institutions who hold your accounts, are required to report to the United States government information about your foreign financial assets. The penalty for you or a foreign financial entity’s non-compliance is an automatic 30% withholding of all transactions that are routed through the United States (and the vast majority of all the world’s financial transactions go through the US).
The United States has also just entered into data sharing agreements, at the sovereign level – government to government, between five of the largest nations in Europe and the US – with a swarm of additional countries asking to join into the data sharing agreement as well.
So just what happens when you are ‘discovered’ and are determined to be non-compliant by the IRS? How does one, as an individual, find out?
For most, it comes as a shock and a horrible surprise. You might be at the ATM in the foreign country where you reside to withdraw funds and discover, inexplicably, that your accounts have been frozen. Another possibility is that it could be an unexpected letter from your bank, saying that your account is locked and your assets have been seized by the IRS. It could also be a letter from the IRS itself notifying you that you have been assessed for X number of dollars (and the sum is usually large to get your attention) and that you need to file X years’ back taxes in order to become compliant. They’ll give you a number you can call and a case number and thus the seemingly endless nightmare begins.