For Americans abroad, taxes just got more complicated

As income tax filing deadline rolls around, spare a thought for the millions of Americans overseas who have been singled out by Congress for special treatment, with a new form that will add to the hassle of tax time for many and, critics say, set up the unwary for penalties.

"It's a monstrosity," Steven R. Horton, whose tax practice in Paris advises American expatriates, said of the new demand from the U.S. Internal Revenue Service: Form 8938, the Statement of Specified Foreign Financial Assets. "It compels every taxpayer to try to find a way that they're guilty of some kind of omission."

The new requirement comes courtesy of the Foreign Account Tax Compliance Act, or Fatca, an effort to crack down on offshore tax evasion by U.S. citizens. The impetus for Fatca was the revelation that the Swiss bank UBS had been helping thousands of Americans — many of them U.S. residents — to cheat the Internal Revenue Service, an offense for which it paid a $780 million penalty and handed over details on thousands of clients to end prosecution.

The new form requires taxpayers to provide detailed information on their overseas financial accounts, including income derived from them. The penalties for failing to file start at $10,000. Significantly, tax experts warn, filers are subject to major penalties for underreporting — and even where innocent errors are made, they say, it will be up to the taxpayer to convince the I.R.S. examiner of their innocence. The statute of limitations does not expire until after a corrected form is filed.

Proponents say Fatca will bring the U.S. Treasury huge sums each year once the I.R.S. is able to compare individual tax data with reports from foreign financial institutions.

"Offshore tax evasion costs the U.S. jobs and billions of dollars each year, and it puts an unfair burden on the average American taxpayer to make up the difference," Senator Max Baucus, the Montana Democrat who is chairman of the Senate Finance Committee and a sponsor of the legislation, wrote in an e-mail. "In an era when budgets are tight, it's critical for the I.R.S. to have the resources it needs to root out tax cheats."

In the United States, financial institutions furnish taxpayers' account information directly to the I.R.S. Under Fatca, filers overseas have in effect been commanded by Congress to do that themselves, turning over every bit of financial information to the government, something that has never been required before.

"We've exported the cost of compliance to the private sector," said Stanley C. Ruchelman, a tax lawyer in New York who once worked at the I.R.S. helping to negotiate international tax agreements.

Asked how long it would take the average filer to complete the Fatca form, Mr. Ruchelman laughed. "Forever," he said.

Mr. Horton, who has already helped a few clients fill out Form 8938, said that for most individual filers, "even if we're talking about a modest set of accounts, it's going to take a full Saturday to do it."

And that's just the new form.

Alone among the citizens of the developed world, Americans have the same tax-filing and tax-payment responsibilities whether or not they reside in the United States. American expatriates still have to file the annual Form 1040, and all the documentation that goes with it — even though most already pay taxes in their countries of residence. (The burden of taxation is softened by a $92,900 exclusion that allows many expatriates to avoid any U.S. liability.)

And many American expatriates are all too familiar with Form TDF 90-22.1, the Foreign Bank and Financial Accounts form, known as FBAR, which must be filed by anyone who had an aggregate of $10,000 or more in overseas bank accounts at any time during the year. In fact, the new Form 8938 asks for much of the same information as FBAR.

The new tax form is part of a two-pronged attack on hidden offshore accounts. Fatca also demands that virtually every financial institution outside of the United States identify and report all American account holders to the I.R.S. or face a withholding penalty on all income from U.S. sources. They reacted with alarm to that, arguing that the measure imposed steep compliance costs and unrealistic deadlines.

But banks know something about making their views known, and the I.R.S. extended deadlines and eased compliance terms in the face of a lobbying blitz.

Expatriates don't have the same clout in Washington, and beginning this year a single American residing overseas with financial assets of more than $200,000 on Dec. 31, or $300,000 at any point during 2011, must file Form 8938; for a married couple filing jointly, the thresholds are $400,000 and $600,000. (For U.S. residents with accounts overseas, the thresholds are much lower.) Homes are generally outside the remit of the law, pensions and deferred compensation are not.

Not even the I.R.S. is certain how many of the estimated four million to six million Americans living abroad will be affected, but the dollar doesn't go as far as it once did. Tax experts say far more than just the storied "one percent" will be affected. Failure to file Form 8938 exposes a taxpayer to hefty fines — $10,000 if they do not file within 90 days of I.R.S. notification. That is in addition to FBAR penalties ranging from $500 to 50 percent of the value of the accounts in question.

Some have wondered why U.S. expatriates should have to file both the FBAR and the Fatca, as they gather essentially the same information, though — confusingly — with different language. Why not just one form?

The information gathered by FBAR, it happens, is used by the U.S. Treasury in its efforts under the Banking Secrecy Act to identify crimes like money laundering and terrorist financing. But that information is not shared with the I.R.S. When Congress decided the I.R.S. should have the tools to find foreign accounts and impose penalties in the audit process, it simply ordained that Americans fill out another form: Form 8938.

International tax experts worry that even accidental discrepancies on the new form will expose filers to big penalties. And if examiners do end up comparing information on the FBAR and Fatca forms, which have different filing deadlines and are sent to different offices, they say, it could open the door to more trouble. "It's going to be a mass of confusion, at least for the first year," said Edward Tanenbaum, an international tax lawyer at Alston & Bird in New York.

The message has begun to be heard in Washington, and some hold out hope that the filings will eventually be unified. The U.S. Government Accountability Office, in a study for Congress, acknowledged the concerns, saying: "Reporting the same information on two different forms creates additional costs to the government to process the same or similar information twice and enforce reporting compliance with both requirements."

In any event, Congress's new focus on Americans abroad suggests it soon will not be possible to just ignore the I.R.S. and hope no one notices.

For those who have been deliberately hiding assets overseas and want to return to compliance, tax experts generally advise consulting a lawyer about entering the I.R.S.'s Offshore Voluntary Disclosure Initiative. The penalties can be steep, but the process usually ends the threat of prosecution. Those who have failed to file FBAR's or other forms out of ignorance might be able to argue that they had a reasonable cause.

But going to the I.R.S. hat in hand, even for the innocent, is a gamble: The agency's conduct of the voluntary disclosure program has been widely criticized, including by Nina E. Olson, the National Taxpayer Advocate, who last year accused the agency, in a report to Congress, of misleading some supplicants with "bait-and-switch" tactics, first reassuring wayward taxpayers and then hitting them with big penalties.

The Internal Revenue Service did not respond to requests for comment on this article.

Mr. Ruchelman said there was a larger question to ponder — that of fairness — considering that the United States is alone among industrialized countries in taxing on the basis of nationality, rather than residence.

"Does it make sense to tax nonresidents and subject them to some of the most complex compliance forms in the 1040 package?" he asked. "Congress seems to believe that the answer is yes."

(Published by NY Times - April 15, 2012)