FOR ALL THOSE ABOUT TO BE FATCA-ed

IRS Form W-9

The consequences of the Foreign Account Tax Compliance Act (FATCA) are starting to be felt. Local foreign banking institutions have begun digging up their American clients and forwarding them letters informing them that if they are Americans then they are required to complete Internal Revenue (IRS) Form W-9. Many people have been asking us whether they need to fill out a W-9 and if so, how to fill it out.

Detailed instructions accompany the form but it is in English and in “tax form speak’, thus many of us living abroad who have not mastered either are encountering difficulties.

As far as IRS forms go, the W-9 is fairly easy to complete. The purpose is to provide information to your banking institution in order for it to report your income from your accounts to the IRS, in the same manner as a domestic American bank reports income to the IRS.

Below you will find a step-by-step easy guide to completing form W-9.

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New Fee Schedule for Consular Services – including one big surprise!

On August 28, the State Department issued its new schedule for fees for consular services. Some of the changes are of particular interest to the “AARO population’ of overseas U.S. citizens. Below is an edited version of the official document followed by a link to the complete document and a list of those changes of particular interest. The most noteworthy and significant of these is the increase in the charge for processing applications to renounce U.S. citizenship by 422%, from $450 to $2,350, effective September 6, 2014.

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Foreign Earned Income Exclusion Under Scrutiny

AARO among the overseas citizen groups consulted

On May 20, the General Accountability Office released a study commissioned by two members of the Americans Abroad Caucus, Representatives Carolyn Maloney (NY 14) and Mike Honda (CA 17), and their colleague Jim McDermott (WA 7).

For its study, the GAO analyzed 2011 IRS statistical data; reviewed the tax code and relevant government and academic literature; and interviewed government officials, experts, and stakeholders, including groups representing citizens working abroad and employers. AARO was asked to contribute to the study and in September 2013, Tax Committee Chair John Fredenberger and President Lucy Stensland Laederich were interviewed by phone.

The report concludes that while it cannot be shown that allowing US taxpayers working abroad to exclude a certain amount of foreign-earned income from taxes boosts exports, other arguments concerning taxpayer equity and competitiveness in foreign markets merit consideration.

Only 0.3% (some 445,000 returns) of all individual tax returns filed for tax year 2011 claimed the Foreign-Earned Income Exclusion (FEIE), with around 17% of these also claiming a foreign housing deduction. Close to 45% of taxpayers claiming the FEIE were able to eliminate all or most of their 2011 tax liabilities.

US taxpayers in high-tax countries can eliminate most or all of their US tax liability using the foreign tax credit, designed to prevent double taxation by both the US and a foreign country. Taxpayers living in lower- or no-tax countries benefit more significantly from the FEIE. Government and Congressional projections of the corresponding tax revenue losses in 2014 range from $4.3 billion to $5 billion.

While the GAO made no recommendation in its report, the Joint Committee on Taxation (JCT) has estimated that repealing the exclusion would increase federal revenue by $6.2 billion in 2015 and $89 billion from 2014 through 2023. It follows that, in the context of the promised overhaul of the US tax code, "Section 911" will inevitably come under scrutiny. One encouraging sign, however, may be that the JCT added that the net effect on economic efficiency of eliminating the tax expenditure (i.e. repealing the FEIE) and taxing all foreign earned income is uncertain.

Click here for the full GAO report.

ACA proposal to resolve non-compliance issues for overseas Americans

Stories are rife in the media today about overseas Americans terrified to "come out of the cold" and comply with their US tax and financial reporting obligations, and about others so confused by those obligations that it seems easier to bury their heads in the sand.

At Overseas Americans Week in February 2013, AARO and its partner organizations spoke to staffers in Congress and the US Treasury about the plight of these otherwise law-abiding citizens who, often through no fault of their own, face daunting penalties because of their double tax obligations (to their host countries, where they already pay taxes, and to the United States, which taxes them merely because of their citizenship) or because of their so-called "foreign accounts" in the countries where they live and work (and must, like Americans in the U.S., have bank accounts for everyday transactions, retirement savings, mortgages, etc.).

AARO's partner organization ACA (American Citizens Abroad) has written to the Treasury Department and the IRS with a simple, clear and eminently sensible proposal to help these Americans who, far from being tax evaders, are, in the main, eager to correct their situation. We applaud their initiative and support their proposal, the full text of which can be found here.

Summary of the ACA recommendation

Since OVDP (the IRS Overseas Voluntary Disclosure Program) is too penalizing, "Streamlined Procedures" are too restrictive and uncertain, and the path of quiet disclosure has been put into question, ACA recommends that the Department of Treasury and "IRS adopt a two-prong strategy to facilitate compliance:

  • transform the current "Streamlined Procedures" into a Comprehensive Compliance Program (CCP) exclusively for bona fide Americans resident abroad, with terms substantially different from the current IRS "Streamlined Procedures";
  • transform the OVDP into a program essentially for Americans resident in the United States.

There would be two clearly distinct programs for two very different groups of taxpayers. Americans resident in the United States who are hiding assets and related revenues in foreign bank accounts are most likely evading taxes. Americans resident abroad, on the other hand, pay taxes to their country of residence.

The CCP would be open to all non-resident taxpayers who have resided abroad for three years or more, as bona fide overseas residents defined in Section 911 of the Tax Code, and who meet one or more of the following four conditions:

  1. who have not filed tax returns and FBARs;
  2. who have filed incomplete or complete tax returns but have not filed FBARs or have filed an incomplete FBAR;
  3. who have filed FBAR forms, but have not filed tax returns;
  4. who do not need to file a tax return because total income is below the threshold for reporting but who meet the FBAR filing requirement and have not filed an FBAR.

Both first-time filings and amended returns would be permitted under the CCP for both the tax return and the FBAR.

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