American Living Overseas May Find the IRS Relaxing Penalties, Tax Rules

Last updated on June 9, 2023

The IRS has begun aggressively pursuing tax evasion using Foreign Account Tax Compliance Act (FATCA). Due to the strict compliance requirements of FATCA, many U.S. citizens living overseas have chosen to renounce their U.S. citizenship. Now, there are indications that the IRS may relax some of its tax rules for Americans living overseas to make it easier for complying citizens to easily fulfill their tax duties in the U.S. The Globe and Mail elaborates:

“New IRS commissioner John Koskinen, a successful corporate and government troubleshooter, acknowledged in a speech last week that his agency has been fixated on tax cheats, with too little regard for ‘non-willful’ victims of its crackdown.

“‘We are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives,’ he said, promising more details of the amnesty program in ‘the very near future.’

“The IRS is now working on creating a path specifically for otherwise honest people who want to comply with their U.S. tax obligations, without using the hammer of steep penalties designed primarily to punish U.S. residents trying to duck their taxes, Mr. Koskinen said.

“‘Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes.’”

The Globe and Mail discusses how FATCA can cause problems for the IRS regarding Americans living in Canada, where almost a million Americans reside.

“The law, which Canada has agreed to help implement, is expected to create a flood of information for the IRS to sort through.

“The IRS is ill-equipped to deal with all this big data. The agency’s budget has been cut by 7 per cent since 2010, leaving it with 10,000 fewer employees.

“‘The IRS has been asked to do more and it’s been given less money to do it with,’ pointed out Kevyn Nightingale, a cross-border tax specialist at MNP LLP in Toronto. ‘FATCA is going to bring a lot of people in from the cold because they know they are going to get found out. So the IRS knows it’s going to have an even bigger problem on its hands.’

“Until now, Americans and dual Canadian-U.S. citizens faced a wrenching dilemma. For individuals whose only transgression is a failure to file U.S. tax returns, compliance has meant years of complicated back taxes and onerous foreign account disclosures, the threat of steep penalties and up to tens of thousands of dollars in accounting fees. As a result, many people have chosen to stay in the shadows, afraid of the heavy and unpredictable financial burden of coming clean.

“Canadian tax experts say Mr. Koskinen’s change of tone could offer a way out.”