Virginia La Torre Jeker, J.D., an attorney with over 30 years of U.S. tax experience overseas, understands the complexities and concerns of Americans living abroad, those holding multiple nationalities and those trying to navigate the U.S. tax system while complying with their own country's tax rules. She is also the founder of Cordoba Management Consulting Company LLC.
Here, Virginia discusses the most common tax preparation issues facing Americans living and working abroad. Read on:
Can you tell us about your background as a tax attorney?
I've been a U.S. tax attorney since 1983 and am admitted to the New York Bar. I've practiced abroad for 30 years, spending 15 years in Hong Kong and 15 years in Dubai. My extensive overseas practice has afforded me a wide depth of specialized U.S. tax knowledge that many tax practitioners do not have. This includes advice for Americans relocating to work abroad, and the collateral U.S. tax matters that will often arise on account of such a move - for example, making investments in foreign assets or properties, marrying a foreign national, taking on another country's citizenship (and perhaps relinquishing U.S. citizenship), opening a business in a foreign country and so on. In addition, I work with many foreign persons who are impacted by U.S. tax issues, such as those considering obtaining or giving up a green card, making U.S. investments, going into business with an American partner or marrying an American citizen.
I have been appointed to, and am very active with, the Professional Tax Advisory Council, American Citizens Abroad in Geneva, Switzerland. I have been quoted in the New York Times, Newsweek and the Wall Street Journal and am regularly quoted in many local news articles and publications as well as invited to make local television appearances. I am regularly asked to speak at numerous conferences and seminars and have published a vast array of scholarly works involving U.S. tax, some of which have been referenced by other attorneys or organizations to the U.S. courts and to the U.S. Congress.
What are the most common tax-related concerns of Americans living and working abroad?
The tax concerns faced by Americans living and working abroad center on two main areas: First, they face a lack of knowledge about the U.S. tax rules that apply to them when overseas. These rules are very complicated and, for the typical expatriate who works for a foreign employer, there is no safety net in the form of withholding taxes and an annual Form W-2 which sets out the compensation earned and taxes withheld, etc. An unprepared expatriate who does not make estimated taxes, for example, will be faced not only with penalties for this failure, but also with a large tax bill at the end of the year and may lack the funds to pay his taxes.
Many make investments in non-U.S. financial products because they live abroad and are exposed to such products by foreign financial advisors. Very sadly, such advisors more often than not, are not properly informed and do not understand the very negative U.S. tax consequences for Americans investing in such products. An excellent example involves purchasing an interest in a foreign mutual fund or "life insurance" product.
Second, expatriates often lack easy access to experienced U.S. tax advisors who can assist in navigating the complicated U.S. tax maze and who can prepare their U.S. tax and information returns correctly. They often rely on their U.S.-based return preparer, who in many cases, lacks familiarity with overseas issues, leading to errors and omissions. This will inevitably lead to tax noncompliance which can become not only a great source of stress indelibly marring the overseas experience, but quite difficult and costly to rectify.
What are the most common mistakes or oversights you find Americans working overseas making in regards to taxes?
The most common mistakes center on misunderstanding the "Foreign Earned Income Exclusion" (FEIE) and foreign housing exclusion rules, the rules requiring annual so-called FBAR filings to report foreign financial accounts such as a bank or securities trading account, as well as the newer information reporting requirements imposed by the "Foreign Account Tax Compliance Act" (FATCA) for "specified foreign financial assets". Here is some greater detail:
Americans working abroad can generally exclude a certain amount of foreign earned income (wages, compensation for services) from U.S. tax under the FEIE rules, as well as some foreign housing costs paid by their employers. These exclusion benefits can be claimed only if a U.S. tax return is filed within certain time deadlines. Those who have dropped out of the tax reporting system risk losing these valuable tax benefits unless prompt action is taken to correct the filing situation. They are also at risk for very harsh penalties including so called FBAR penalties.
- Not filing a tax return even if income is under FEIE threshold
- Including "non-earned" income in the FEIE threshold calculation (for example, interest, dividends)
- Not including in the calculation of income, calculations made by a foreign employer to an unqualified pension plan
- Making IRA contributions when there is no income or not enough income subject to tax because of the FEIE
- Failing to include certain amounts or in-kind benefits from the employer. Americans overseas often do not realize that these must be included in income (for example, when the employer provides airline tickets home for the taxpayer and his/her family; or pays tuition directly to the school where the taxpayer's child studies abroad)
- Housing allowances are also a common source of confusion. If the taxpayer owns his own home (as opposed to paying rent for his accommodation), the taxpayer cannot utilize the Foreign Housing Exclusion to exclude from income the housing allowance paid by his employer
- Many mistakes are made in filing the annual "foreign bank account report" or "FBAR". You can learn more about FBAR here
- You can learn more about mandatory reporting of "specified foreign financial assets"
Where can Americans living abroad learn about their tax responsibilities in an easy-to-understand manner?
There is a plethora of information available online for expatriates. The problem is that if you weed out the items that are too complex for the layman, and then weed out the information that is incorrect, you are not left with many reliable and comprehensible resources!
Another very helpful resource is Internal Revenue Service (IRS) Publication 54, U.S. Tax Guide for U.S. Citizens and Resident Aliens Abroad. Unfortunately, and unbeknownst to many persons, taxpayers cannot rely on IRS oral advice, advice in IRS publications or instructions to the tax forms.
For Americans living and working abroad, this is a significant problem since the tax rules are more complex for such individuals. In my view, finding a competent and experienced U.S. tax professional is the best bet.
In what areas does the IRS find the most fault with Americans living abroad? What seem to be the biggest problems on audits?
The biggest problems revolve around incomplete U.S. tax filings for the U.S. person living overseas. There are literally dozens of U.S. tax forms that will more often be required when one is abroad, rather than when one is exclusively living and working in the USA. The requirement to file some of these forms can be triggered from the most innocuous of actions or events - for example, opening up a foreign bank or securities account, receiving a gift or inheritance from a foreign person, investing in a foreign mutual fund, taking out a foreign life insurance policy, setting up a foreign corporation or transferring capital or assets to it, becoming an owner or investor in a foreign business, receiving stock options from your foreign employer, owning foreign financial assets the value of which exceeds a certain threshold, and the list goes on. Failing to file the correct form or forms can result not only in imposition of harsh monetary penalties for each form that was missed, but can also result in the tax year remaining indefinitely open for an IRS audit!
What special considerations should Americans who've temporarily relocated overseas for career purposes make when it comes to taxes?
Some important considerations include the following
- Find a competent U.S. tax advisor before you move overseas or soon after. Don't let this wait until the last minute when tax returns are due.
- If you are responsible for payment of taxes in the country where you are working, find a local advisor who also has experience with American clients. Your U.S. tax advisor may need to liaise with your local advisor and you want to make sure the local advisor is comfortable in that role.
- If you are working for a foreign employer, your employer will not withhold income taxes from your pay. Ask your tax advisor about making payments for estimated taxes so you won't be penalized or caught short for cash when you file your tax return.
- Keep meticulous records of your travel to and from the USA, and days spent working in the U.S.. This information will be very important in completing your tax returns. It will be especially important in the first year you move abroad and wish to qualify for the FEIE (discussed earlier).
- Don't invest in any foreign financial products or assets without first obtaining solid U.S. tax advice from an advisor with the relevant international US tax experience.
What are some of the frustrations Americans abroad have about working with the IRS?
The IRS is very difficult to reach Stateside and its budget does not permit having staff at the various U.S. Consulates or Embassies. In addition, many Americans abroad suffer from subpar internet access or quality; subpar mail delivery services in their home countries, with IRS communications (if they arrive at all) arriving with action dates already past due. They also suffer from subpar service from the IRS not only due to a lack of IRS offices internationally, but due to a lack of knowledge on the part of many IRS agents of the complicated US tax laws impacting Americans living abroad.
Americans abroad live in different time zones, have different holidays and even different "weekends" to the U.S.. Yet, given the extreme complexity of the tax rules impacting this group, it is the group in most dire need of IRS help that is readily accessible despite such differences. Unless the tax laws are significantly simplified, the diverse community of Americans living throughout the world who are already dealing with complicated home-country investment and local tax rules, will continue to have more servicing needs than taxpayers living in the US. To date, these needs are not being met by the IRS.
What advice do you find yourself repeating to readers and clients over and over in regards to their tax responsibilities while living and working overseas?
You can count on your tax duties and tax filings becoming more complicated and confusing because of your relocation abroad. If you don't have a U.S. bank account, even making payment of your taxes will become more cumbersome! As daunting as all of this may feel, you must not allow yourself to fall into the trap of either becoming delinquent with your tax filings, or, using a tax return preparer who lacks the requisite international experience.
I know it may be hard to let go of your U.S.-based return preparer with whom you may feel comfortable and familiar, but if he or she does not have many clients living and working abroad, you should not be using this preparer. Finding the proper tax advisor is the best advice and of course, I am here to help you no matter where you live!
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