Recently, the National Taxpayer Advocate’s Report to Congress has been published and contains over nine hundred pages of findings, studies, and proposals regarding how the IRS can improve its taxation system. This year, the Taxpayer Advocate Service (TAS) has introduced a publication called “The Purple Book” with 50 legislation recommendations that seek to “strengthen taxpayer rights and improve tax administration.” These recommendations come in addition to the serious tax problems the advocate has identified in the report. The report contains several issues of particular interest to US expats that could significantly change the expat tax preparation process if enacted by Congress.
Legislative Recommendations Proposed
Improving the filing process was one of the broader recommendations made to Congress, and for expats this specifically includes integrating the reporting requirements for those subject to both Form 8938 (under FATCA) and FBAR. If enacted, this would help alleviate the dual taxation and dual reporting requirements that some expats face. Further, if an expat is considered a bona fide resident in another country, on Form 8938 they would be able exclude the financial accounts they maintain. However, this recommendation has been made in previous years as well, and at this point, the redundancy remains.
Another recommendation was that Congress should allow taxpayers outside the US additional time to request abatement of a math error assessment. The reasoning behind this recommendation is somewhat obvious: mail can take substantially longer to reach those living abroad. This would shore up the law with the standard time allowed for those who have received a notice of deficiency to petition the Tax Court, which is increased for those who reside outside of the US.
Next, the Taxpayer Advocate report recommended that the Internal Revenue Code (IRC) be amended to clarify failure to file penalties, specifically as they pertain to Americans living abroad. This amendment would mean the penalties would not be imposed if the failure to file was due to reasonable cause rather than willful neglect, even if the individual had a continued period of failing to file. A further recommendation is that willful neglect be defined specifically to exclude a taxpayer’s first failure to file penalty if the tax deadlines differ in the country in which they reside. The reasoning behind this recommendation is that the way the code is currently worded is inconsistent and can easily cause confusion, and also because willful neglect is a gray area when dealing with the taxation of American expats.
Serious Problems Identified
The online services provided by the IRS are not adequate for a wide range of taxpayers who have spotty access to the internet or do not feel comfortable sharing financial information the internet. For this reason, the Advocate has recommended increased telephone services and changes to the internet services currently provided. Traditional means of contacting the IRS are still necessary for a wide range of taxpayers, including those who live in areas that may not be well-connected to the internet.
Another problem that affects expats is the Fixing America’s Surface Transportation Act (FAST Act), enacted in 2015, that requires the Department of State to deny a passport application or revoke an existing passport of anyone who has been certified as having seriously delinquent tax debt. Seriously delinquent tax debt is defined as owing $50,000 or more including penalties and interest accrued. The IRS plans to implement this program in early 2018, and it would affect over a quarter of a million taxpayers, so time is of the essence. The Taxpayer Advocate noted concerns as to whether taxpayer rights were being violated, and if this would infringe upon the right to due process, which protects international travel. The taxpayer advocate recommends that the IRS give taxpayers notice before certifying their taxes as seriously delinquent and use discretion to allow for extenuating circumstances.
Lastly, taxpayer’s right to a fair and just taxation system was listed as a serious problem due to the absence of an effective way to measure and evaluate its fairness. The suggestion mentioned was to implement concrete strategies to appraise IRS employees’ actions and how appropriate they were for each individual situation.
Last But Not Least
The Taxpayer Advocate is aware of the ways in which American expats can be heavily burdened by their taxes, and this is refreshing in the midst of a tax reform that largely ignored the expat population. The latest Taxpayer Advocate report is an indication that expats have reason to hope that, if Congress agrees with the assessment, their tax situation will be simplified and the penalties imposed may be reduced.
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