National Taxpayer Advocate Highlights Tax Nightmare for Americans Abroad — Again…

Francisco Goya’s The Sleep of Reason Produces Monsters

In her latest annual report to Congress, the National Taxpayer Advocate, Erin M. Collins, has highlighted–again–the fundamental unfairness of the U.S. tax system with respect to double taxation of Americans who live abroad. 

Unlike other developed nations, the United States imposes a uniquely mean tax burden on its citizens living abroad. They are required to report their worldwide income and assets to the IRS, regardless of where they live or where their income is earned, along with details of every “foreign” financial institution with which they have any dealings. 

The National Taxpayer Advocate is an independent ombudsman for the taxpayer within the IRS. It is her job to ensure that every taxpayer is treated fairly and that they know and understand their rights.

We can almost hear the sigh of exasperation Ms. Collins must have felt as she penned these lines: 

“The approximately nine million individuals with a U.S. tax filing obligation living abroad face additional burdens at every step of the process to comply with their U.S. tax obligations.”

Déjà vu

That’s because she has said so before, again and again, including highlighting the issues confounding Americans abroad among the “most serious problems” she has identified to-date–without the IRS doing anything meaningful to reduce the burden. 

In this year’s report, Ms. Collins highlighted the stories of an American couple who found U.S. tax laws confusing and ultimately costly while living in France, with little real-time help from the IRS. They were denied the Foreign Earned Income Exclusion, incurring unexpected taxes and penalties. High compliance costs were also evident: hiring a specialized tax preparer in France cost them $1,600 yearly for all filings–on top of the taxes they already paid in France.

They struggled with U.S. tax refunds via paper checks in Europe and high mailing costs for small tax liabilities.

Another example of injustice that she highlighted in this year’s report were Automatic Penalties for International Information Returns ( IIRs): The IRS automatically imposes penalties for late or incorrect International Information Returns, often without considering reasonable cause. These penalties disproportionately affect less wealthy individuals, immigrants, and small businesses who lack access to expert tax advice.

Double taxation, double hassle

Because of the Foreign Earned Income Exclusion, most Americans overseas end up owing the IRS no U.S. tax–year they are forced to provide complicated and costly annual tax returns. Just because they’re American. 

This report also mentioned problems with Gift and Inheritance Reporting: Taxpayers who are unaware of their U.S. reporting obligations can face hefty penalties for not reporting tax-free gifts or inheritances, with a high rate of penalty abatement later, showing potential over-penalization.

None of these examples are particularly new to Tax Fairness for Americans Abroad, which has used this blog to highlight many examples of unjust double taxation of Americans abroad. Still, it carries more weight when the IRS’s own internal ombudsman tells Congress that the system is unjust. 

Residence-Based Taxation

Whereas the Taxpayer Advocate’s advice to the IRS normally involves asking the agency to be “nicer” to Americans abroad, we have a much better solution: End the double taxation of Americans abroad once and for all. This would bring the United States into the company of other great nations, none of which impose double taxation on their citizens who live abroad. 

Rep. Darin LaHood’s Residence-Based Taxation for Americans Abroad Act is the solution. A bipartisan, very thoughtful, revenue-neutral solution. We urge all members of Congress to support Mr. LaHood’s bill when it is reintroduced into the 119th Congress and help President Trump make good on his campaign pledge to end double taxation for Americans Abroad.