The New Deferred Compensation Compliance Campaign and Tax for US Citizens Living Abroad

The New Deferred Compensation Compliance Campaign and Tax for US Citizens Living Abroad
November 27, 2019

If you don’t keep up with IRS news these days, that’s okay, because Greenback is keeping track of it for you. This past year, the IRS shifted its focus pretty vigorously towards compliance and tax for US citizens living abroad. And recently, the IRS launched six new compliance campaigns. These campaigns give us insight into where the IRS is headed, whether that be toward lenience or compliance. And though the IRS has also created a new amnesty program for those who have renounced (or are thinking of renouncing) their citizenship, overall, the IRS is heading toward a strict regime of compliance. One of these campaigns focuses on taxpayers who received deferred compensation. Find out what expats need to know in our summary below.

What Are the New Campaigns, and Why Do Expats Need to Know About Them?

The new campaigns were rolled out in July, and nearly all of them will have some impact on tax for US citizens living abroad. The new IRS compliance campaigns are:

  • S Corporations Built in Gains Tax – This campaign primarily affects expat entrepreneurs.
  • Post OVDP Compliance – With this, you’ll find the IRS is working to help address tax noncompliance related to foreign income and asset reporting requirements.
  • Expatriation – The expatriation section says that US citizens and long-term residents who expatriated after June 17, 2008, and are tax non-compliant can expect to have their situation addressed in the form of soft letters and examinations.
  • High Income Non-filer – The IRS is looking for expats with high income and will bring them into compliance through an examination treatment stream.
  • US Territories – Erroneous Refundable Credits – Expats who wrongfully claimed tax credits and need to file an amended return will be affected.
  • Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009

Expats should be aware that some of these campaigns target expats specifically, but any of these could affect expats in certain financial situations. Overall, expats around the globe now have additional incentive to become tax compliant.

How Will the New Campaign Affect Tax for US Citizens Living Abroad?

Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009 affects two subgroups of expats:

  • Expats who received deferred compensation, including foreign pensions.
  • Expats who have earned but not received compensation from before 2009 and may have a 20% excise tax to pay. The deadline to receive payment was December 31, 2017, and the IRS seeks those that didn’t comply.

Under IRC Section 457A, deferred compensation earned before 2009 does not need to be reported as taxable income until the value is known and the amount is non-forfeitable. In other words, compensation that you will receive in the future, but only if you meet certain conditions, for example, would not be taxable income until you have met those conditions. However, as soon as those deferred payouts do meet the criteria above, the taxpayer must include them in earnings for the year.

Because it’s not always easy to identify when deferred compensation is no longer subject to a “substantial risk of forfeiture,” taxpayers frequently don’t know when to include it. Not to mention, determining the value may require an actuarial valuation. And all that’s assuming the individual even knows that it needs to be included in the first place! Under the new compliance program, the IRS is seeking individuals who have deferred compensation that should be – but has not yet been – taxed.

Why Is It So Important to Get Compliant?

The IRS has announced that it will begin revoking passports of those who are in seriously delinquent tax debt, for which the threshold is currently $52,000. This is a threshold particularly easy for expats to reach. So, if you live abroad and haven’t been keeping up on your reporting requirements for tax for US citizens living abroad, you’ll want to rectify that before the IRS reaches out to you.

If you wait until the IRS reaches out to you, you won’t be able to qualify for their amnesty programs for taxpayers who voluntarily come forward to rectify tax noncompliance. The Streamlined Filing Procedures, for example, allow expats who didn’t know they needed to file tax returns to get caught up penalty-free. Expats unable to use this amnesty program face much higher fines and penalties than those who take action.

Get Caught Up Now!

Greenback accountants are prepared to make the tax filing process easy. Get started with Greenback today!

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