ACA American Citizens Abroad

The International Tax Gap and How It Could Impact YOU!

Tax advice from Jane Bruno.

This year of 2009 brought with it a lot of changes—a new US president, unprecedented instability in world financial markets, economic downturns everywhere , and so forth ad infinitum.  But our focus here is on changes in the US tax law and what strikes me as most relevant to Americans overseas right now is a new emphasis by the IRS on what it calls the “International Tax Gap”.  

The concept of a “tax gap” is not new and it is defined as the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time.  Of course, the IRS has always been concerned with closing this “gap” and is now concentrating  its efforts on the international arena to include Americans living abroad, non-resident aliens living in the US, and international corporate taxpayers. In fact, the IRS has created a series of 18 articles entitled “International Tax Gap Series” (www.irs.gov) that are intended to educate taxpayers about their tax obligations in a variety of situations when they live overseas, etc.  It is well worth taking a look at these articles to see if they might apply to your situation.

This Tax Gap Series is only the tip of the iceberg, so to speak.  What is really happening is the IRS is subjecting tax returns by Americans overseas to increased scrutiny in an effort to collect more tax.  This can be very uncomfortable for the taxpayer who is asked for documents to support mortgage interest deductions, business expenses , etc .  Not only is it time-consuming, but there is a sense of being invaded, vulnerable and potentially open to a large, unexpected tax bill.

The purpose of this article is to alert you to this new situation and offer the following bits of advice:

(1) Continue to file your yearly tax return in the US.  If you already file, stay in the system and continue filing, using the best information you have available to report income and expenses.  If you haven’t filed in many years, consider getting back in the system by filing for the last 6 years.  The increasing communication between the IRS and the tax systems of other countries will make it harder and harder to keep your non-filing a secret—and passport renewal is tied to filing your tax return under current law.

(2) Only report income and expenses that you can substantiate.  If you don’t get a W-2, ask your employer for a statement of income.  If you have business expenses, keep a log of some kind—with a daily planner, bookkeeping software, credit card/bank statements—anything that provides a record you can offer to the IRS if asked.  The IRS can only request information about a tax return for 3 years from the date of filing so you don’t need to keep records forever, but you should keep them for about 5 years.

(3) If you get a notice from the IRS asking for more information or sending you a revised tax bill, DON’T PANIC and DON’T IGNORE IT!  This point cannot be emphasized  strongly enough—you MUST engage in this process.  It will not go away just because you throw away the notice(s).  As calmly as possible, read the notice or bill carefully and determine what the IRS wants.  Do not automatically assume a bill is correct—the IRS has been known to make mistakes.  Then call the contact IRS employee on the notice and have a conversation.  Treat the employee with the respect you would like to receive from a caller, and recognize they are real people doing a tough job.  If it seems you cannot handle the matter on your own, contact a tax professional and turn it over to him/her.  Be patient and give the system a chance to work.  If it turns out you owe more tax than you can presently pay, ask for a payment plan on terms you can handle.

As we enter a future of increasing globalization and high-tech communication, it is not surprising the IRS is expanding its reach into the lives of Americans overseas.  But as long as you understand your obligations in reporting information honestly to the IRS, and are proactive in responding to IRS notices, you and the IRS can get along just fine.

Jane Bruno, JD, LLM, has prepared tax returns for Americans living overseas for the past 20 years.  Her business, Bruno American Tax Services (www.expattaxpreparation.com ), is located in Florida, but she works with Americans all over the world.  She can be reached at 561-222-9273 or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it