Ex-Pats Who Fail to File Tax Returns: Beware

Like it or not, paying taxes is one of the patriotic duties that most every American will become very familiar with. For the most part, U.S. citizens living in the country are good about filing their taxes and paying what they owe. Voluntary self-assessment has been successful during its use in the U.S. taxation scheme and saves the government plenty of money. Instead of attempting to calculate what taxpayers owe, tracking them down, sending them a bill, and collecting the revenue, the IRS simply allows taxpayers to determine what their liability is and is then able to focus their attention on non-compliance.

In fact, with the current system in place, estimates show that voluntary compliance fluctuates between 83 and 85 percent. This statistic is greater than most other nations and is not anything to balk at. Although some taxpayers will cheat the system, the threat of being caught, investigated, and criminally prosecuted tends to lead to such high compliance percentages.

With all of the above being true, the Internal Revenue Service has a problem on its hands. Taxpayers that reside in the United States are generally easy to keep track of. Their employers are in the States, their families are domiciled in the States, and the IRS usually knows exactly where you live and can easily collect from you if you owe. But for expatriates abroad, none of those factors are generally true. It is because of this that instead of upwards of an 80 percent compliance rate for domestic taxpayers, that percentage reflects the noncompliance rate among expatriates.

Recently, the lack of compliance by Americans living overseas that haven’t renounced their U.S. citizenship gained the attention of the Treasury but up until last month, there wasn’t any true method for information about U.S. citizens abroad to be effectively and accurately transmitted to the IRS. But that has now changed and it very well may be the end of the line for those ex-pats who have failed to file over the years.

Last month, we covered the unveiling and implementation of the new International Data Exchange Service. The new protocol was created in order to provide a means for foreign banking institutions to transmit information to the IRS in order to comply with the Foreign Account Tax Compliance Act (FATCA). The FATCA requirements were created in order to ensure that Americans living both domestically and abroad complied with the Foreign Bank Account Reporting laws that require that any foreign bank account with a balance of more than $10,000 at any point of the year be disclosed at tax time. It is the International Data Exchange Service that may bring the required data to the IRS needed to not only enforce FBAR requirements, but to also enforce compliance generally among those ex-pats overseas.

Through the International Data Exchange Service, banks will send account information that includes the personal data on ex-pats that the IRS had no way to easily retrieve prior to the protocol. In the event that an ex-pat’s information is transmitted through the Service and is gives off any red flags to an IRS agent, the Internal Revenue Manual (IRM) provides for a procedure in which the taxpayer’s information is turned over to the IRS Criminal Investigation’s Division. From that point, an additional investigation will be conducted and the case will be referred to the Department of Justice for prosecution, if deemed necessary.

Although many of the ex-pats living overseas who fail to file returns do so without malice or the intent to defraud the government, the failure to file a tax return or lying about the existence of foreign bank accounts can result in years in federal prison. In addition to the risk of incarceration, both types of convictions can come with heavy civil penalties that are large enough to wipe the average American out, financially.

If you are a ex-pat living outside of the United States who hasn’t filed a tax return or if you are a U.S. citizen generally and haven’t disclosed a foreign bank account, the best thing for you to do is to contact an experienced tax attorney for guidance. In many circumstances, a trained tax lawyer who is familiar with criminal and civil tax law will be able to minimize or even eliminate the damage caused by non-compliance before an investigation has commenced. If the government has already opened an investigation or audit with regard to your tax affairs, there is an even bigger reason to contact a tax attorney as soon as possible: when an investigator has you alone without an attorney, they know exactly what to ask in order to elicit incriminating responses. A trained and experienced tax attorney will provide you with the most effective advocacy, taking a heavy load off of your shoulders.

The tax professionals at the Tax Law Offices of David W. Klasing have years of experience helping taxpayers with a myriad of tax issues ranging from Offshore Voluntary Disclosure Program participation to audit defense and criminal tax defense. When you are going up against the IRS or Department of Justice, don’t go alone. Let us be your advocate, zealously fighting for you. Contact the Tax Law Offices of David W. Klasing online or by phone at 800-681-1295 today for a reduced rate consultation.