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US expatriates urged to seek tax advice

People failing to comply with new regulation must file returns or face penalties

  • By Kevin Scott, Staff Reporter
  • Published: 00:00 May 16, 2012
  • Gulf News

  • Image Credit: Bloomberg
  • The Internal Revenue Service building in Washington. Fatca requires foreign financial institutions to report directly to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.

Dubai: American expatriates in the UAE are being urged to seek specialist tax advice as the US government clamps down on people cheating the system.

A piece of legislation known as the Foreign Account Tax Compliance Act, or Fatca, is causing great concern among Americans living overseas as they face up to new filing demands that critics say are excessive and overblown.

Expats who have fallen out of compliance with the US tax rules or who are unsure if they have been filing correctly should speak to a US tax attorney, not an accountant, in order to receive attorney client privilege

Virginia La Torre Jeker, Dubai-based tax specialist

Some UAE-based Americans with dual-citizenship are even looking to renounce their US passports in a bid to avoid complying with the new regulations.

"Expats who have fallen out of compliance with the US tax rules or who are unsure if they have been filing correctly should speak to a US tax attorney, not an accountant, in order to receive attorney client privilege," said Virginia La Torre Jeker, J.D., a Dubai-based tax specialist.

"As for trying to fix up past mistakes, proper advice must be sought. It is too risky to fill in the FBAR (report of foreign bank and financial accounts) on your own, at least initially.

"The pace has really picked up; people have been reading about convictions for criminal tax evasion and they are getting scared, especially those close to retirement age. They know when they return to the US and are drawing on social security, it can be taken away if the IRS comes calling. People are scared and, in fact, they should be scared," she added.

Fatca is a piece of government legislation that requires certain US taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938), which must be attached to the taxpayer's annual tax return.

Wilful blindness

According to Jeker, claiming ignorance of US tax obligations will not be deemed a sufficient excuse to avoid penalties as Fatca has been well publicised in recent months. "The IRS has a concept of "wilful blindness" and if the IRS can demonstrate a taxpayer evidenced wilful blindness in not meeting his tax obligations, this can lead to severe penalties," she said. Reporting applies for assets held in taxable years beginning after March 18, 2010. For most taxpayers this will be the 2011 tax return they file during the 2012 tax filing season. According to the IRS, failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000, and a penalty up to $50,000 for continued failure after further notification.

"The initial feedback from US expatriates and businesses is not positive," said Asim Shaikh, partner at Ernst & Young, Middle East and North Africa. "Most US expatriates believe in the importance of paying taxes and are supportive of any effort made by their government to prevent tax evasion. However, they believe Fatca is too far-reaching and may have a significant impact on investments in the US from the Middle East and other growing economies," he added.

Fatca also requires foreign financial institutions (FFIs) to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by June 30, 2013. "The important thing to understand is that Fatca is primarily designed to deal with foreign financial institutions such as banks, pension funds and mutual funds," said Dean Rolfe, tax partner at PricewaterhouseCoopers.

Awareness

"People have been aware of Fatca for a number of years, but it has been difficult for businesses to decide what they needed to do; they have to be up to speed by 2014, however, or they will be subject to withholding taxes," he added.

Rolfe says individuals will also be impacted by Fatca as the IRS will join the dots further down the line. But he also stressed there was always an opportunity to set the record straight and for American expatriates to come back into compliance with the system. "As far as individuals are concerned, they may be asked to provide information to banks/funds where they have money located if those institutions sign up to the Fatca agreement," he said.

"The US system involves taxing Americans working in the Middle East; they are subject to file tax returns. There are an awful lot of people, either deliberately or by mistake, who have not done so in the past but Fatca has concentrated their attitude on the matter; they know they have to be compliant and up-to-date with their taxes," he added.

However, some American expatriates are already seeking drastic action to avoid complying with the new regulations including renouncing their US passports and green cards.

About 1,780 expatriates gave up their nationality at US embassies last year, up from 235 in 2008, according to Geneva's Overseas American Academy. Jeker says she has recently spoken to many American expatriates in the UAE who have considered renouncing their citizenship or green cards.

"Many people do not fully understand what they have to do to formally relinquish their US tax status. Many simply disappear underground. But in the eyes of the US tax law they are still US citizens, or in the case of certain green card holders they are still US tax residents; both are liable to tax on their worldwide income," she said.

"There are many steps to consider and one of them is certifying under the penalties of perjury you have met all your US tax obligations for the past five years. You cannot get rid of what is perceived by many as a "curse", without getting back into compliance with the US tax system. It is causing sleepless nights for a lot of people."

What is fatca?

Fatca is a piece of government legislation that requires certain US taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938), which must be attached to the taxpayer's annual tax return.

Reporting applies for assets held in taxable years after March 18, 2010. For most taxpayers this will be the 2011 tax return they file during the 2012 tax filing season. According to the IRS, failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000, and a penalty up to $50,000 for continued failure after further notification.

— Source: Internal Revenue Service

Comments (6)

  1. Added 19:42 May 16, 2012

    No other country double taxes it's citizens the way the US does. It is a human rights violation. The Canadian government sees it that way and it challenging FATCA which other governments are doing too. Court cases are lining up in the US. FATCA and the penalties are in violation of several US constitutional Amendments, and it will go to the Supreme Court. It is not a cut and dry situation. The IRS is not one of the US government branches and cannot simply make decisions for Americans. It is an unelected body. The lawsuits will go on for years and years. It will be disastrous for the US economy as the US will know tattle on every foreign citizens bank accounts in turn to their governments. Capital will flee the US as it should. This is an imperialistic piece of legislation and a human rights violation. The US has put up it's own Berlin Wall against it's population. It similar to what a communist government would do to trap it's people inside. Eventually, major changes will have to be made or the US will lose trillions, as it should for such a stupid piece of legislation created by unelected officials.

    Jessica, Miami, United States

  2. Added 15:39 May 16, 2012

    I will have to strongly agree with Mr. Johnson. My wife and kids are US citizens and during the Israel-Hezbollah war in Lebanon, the US Navy evacuated thousands and thousands of US citizens, most of which are Arabs in origin. They moved them by a hovercraft to a navy ship and from there to Cypress. From Cypress each was flown to their respective state and they all reach their homes safe and sound. Stuff like that cost the US Gov A LOT of US Dollars so they are surely entitled to the tax they impose on their citizens. I was grateful that my wife and daughter were moved out of harm's way and it provided a lot of relief to me as a father and a husband.

    Zack, Dubai, United Arab Emirates

  3. Added 14:56 May 16, 2012

    The US personal taxation system (Federal) is quite similar to some of the other Western countries in respect of taxing worldwide earnings based on an whether or not an individual holds their country’s passport. A notable exception is the UK which taxes individuals based on the place of residence and their domicile and not based on citizenship. Non-resident Greencard holders or US Citizens are given certain allowances (exemptions) but it is not always enough to offset their total taxable income. This in most cases results in a tax bill which is nothing more than the price paid for the 'privilege' of holding an American passport or a Green Card. What most people revoking their Green Card or American Passport don’t realise is that there are tax filing obligations (for a certain number of years) even after the American Passport or Green Card has been revoked. They are mistaken if they think that just by going to the American Embassy and filing out a revocation form, they will eliminate all future US taxes. Tax Treaties generally eliminate double taxation but since the UAE doesn’t have a tax treaty with the US and there is no tax regime in the UAE, any employment income (or any other income) earned by a US national/Greencard holder in the UAE (after exemptions) will be taxed in the US. It is not a question of whether dual nationals should be taxed or not but rather a question of how much they should be taxed on and at what rate. For eg: the annual foreign housing exclusion & the foreign earned income exclusion rates can be increased to ease the tax burden.

    Ash, Dubai, United Arab Emirates

  4. Added 12:40 May 16, 2012

    The $50,000 threshold mentioned in the article applies only to certain taxpayers living in the US. Expats have higher thresholds. (For example, the threshold for those who are married filing a joint return while residing abroad is $400,000.) Everyone who is concerned should log onto IRS.Gov before they panic and spend alot of money on professional advice. Also, the article should have mentioned FBAR reporting requirement of bank accounts exceeding $10,000 during the year. Many more expats are subject to that rule that the FATCA discussed.

    Bruce Leckey, Dubai, United Arab Emirates

  5. Added 09:43 May 16, 2012

    US government provided unparalleled protection and services for their citizens oversea. So it is their proud to pay tax for the country. They don't have any idea about how many people wants to pay this tax to get a passport from US or even a visa to stay there.

    Johnson, Dubai, United Arab Emirates

  6. Added 02:45 May 16, 2012

    Americans working abroad are not the same as Americans in the USA hiding investments abroad not to pay US taxes. We have nothing to hide for no other reason because we have tax credits for the taxes we pay in our country of residency. The USA IRS trapped us by creating FBARS in the silence of the night and then penalizing us for not knowing about it. Unfair, very unfair. So much so that the IRS Tax Adviser has ptotested in our behalf.

    Inpain, Sao Paulo, Brazil

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