News from 30-year IRS vet: IRS will track expats using Form 1099R

Steven J. Mopsick asked me to share this blog with our readers:

Tuesday, April 10, 2012

Who Said The IRS Doesn’t Give a Hoot About Providing Guidance to American Expats?!

Last week, the IRS announced a new compliance initiative aimed at the estimated seven million Americans who reside outside the United States. The IRS has launched a new International Compliance Project under which the IRS will match up forms 1099-R with “a selection of individuals with foreign addresses,” pull those returns for a “look see” to ascertain whether the expat correctly reported an early distribution from a retirement account  on his form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) .  If the IRS concludes from its preliminary check that a little chat might be in order,  the expat will receive a “compliance contact letter” asking for additional information. A reference on the announcement to “other resources” reassures us that receipt of a compliance check letter is not an audit or investigation.  Rather, the IRS is “just checking” to see what’s up and warns that if the taxpayer blows the letter off and refuses to provide the information requested, it may just decide that a full blown examination or investigation is warranted.

Lessons to be learned: (1) the IRS has gotten very good at matching up 1099’s and other information returns with 1040’s. (2) the IRS continues to be very serious about tax compliance amongst Americans living abroad, and (3) playing fast and loose with your IRA or other retirement account is not the way you want to go if you just want to see if the IRS can take a joke.

http://www.irs.gov/retirement/article/0,,id=223461,00.html

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24 thoughts on “News from 30-year IRS vet: IRS will track expats using Form 1099R

  1. The IRS reference document states: ‘International tax law is extremely complex. As a general rule, the pension/annuity articles of most tax treaties allow the country of residence to tax the pension or annuity under its domestic laws.” Most, if not almost all, countries with residence-based taxation, which is every country in the world except the US with its unique Citizenship based taxation, do indeed tax pensions and annuities under their own domestic tax laws. It does not take a tax treaty with the US to allow other countries to do this since it is their sovereignty that deternines this.

  2. Another reason NOT to get or expect anything from the USA. What this suggests is that anyone who is receiving any kind of payment from the USA government and has a foreign address will be identified. But even then, except for cutting off payments from the USA what can they do? Put out an Interpol alert?

  3. If an IRS agent visits you overseas, invite him/her in for coffee and keep them prisoner with biscuits discussing why US tax policy sucks and a waste of time. In the UK you have to pay for a TV License and I kept the inspector in my living room for about an hour while I was “looking” for the license – he hated it – but enjoyed the tea.

  4. @john, There is also one other thing you can do. Call the local police and tell them that there is an agent of a foreign government in your home at that very moment, attempting to enforce the laws of that foreign country within the sovereign borders of your own country, so please send an officer to place him under arrest.

    US tax treaties do not grant any right to the US Govenment to engage in such activities within the sovereign territory of the other country. They may allow the US to request the assistance of local auhorities, but they do not allow them to do it on their own.

  5. I’m only joking – the outcome would be to tell them to f-off, get off my property, go back to the embassy and hide in his bunker.

    The US will never see a penny of my overseas assets when they don’t deserve anything and I don’t benefit from it. I’d rather give it to my local tax authority to help build a new school.

  6. @thanks, John. I couldn’t believe that the IRS would actually send an agent into a foreign country to try to collect US taxes, but when I see on TV how the US Government’s GSA just sqandered $882,000 for a mega-party in Las Vegas for its employees, and then sent some of them to Hawaii to go snorkeling, then it is no wonder why more effort is being dedicated by the IRS to squeeze more tax revenue out of citizens and green card holders living abroad where they have already been taxed once on the income on which the IRS wants to tax them the second time.

  7. @Roger
    ‘send a drone to wipe you out’. Now that is funny. Thanks for my laugh of the morning, Roger. (But of course as we know, they can and do send drones!)

  8. Roger, as everyone and this blog knows taxing ex-pats is never going to raise the level of revenue the federal government needs. Whoever wins in November will have to bite the bullet. I think the Republicans are making an error with health care.

    If the Supreme Court stikes it down, the Democrats will benefit, I think most Americans want guarenteed health care. If it gets upheld, the Democrats will sell the benefits, what can the Republican sell? Turn back the clock? Come on that’s not going to be a vote winner.

  9. I am not sure the lessons Steve Mopsick draws from this announcement are the right ones.

    Form 5329 is used, respectively, to compute the 10% or 6% excise tax (not income tax) owed as a disincentive/penalty for early withdrawals from tax-advantaged IRA accounts or for making contributions in excess of the statutory limitations.

    The taxpayer ordinarily computes his/her own penalty, adds the amount to any other taxes owed and sends it in along with their annual tax return. As noted above, however, the 5329 is characterized as an “excise tax”. The Form 5329 is designed to be submitted independently of an income tax return. Evidently, the IRS has a separate department for computing and assessing excise as opposed to income taxes.

    In my experience the IRS has been grostequely inept at handling Form 5329 that are submitted with annual income tax returns. The fact that the 5329 is designed to be independently apparently caused the IRS to order their paper return processors to segregate any 5329 filed with a return and process it separately as an excise tax return. Unfortunately, they failed to instruct their employees processing the severed 5329’s to give credit for payments that were shown on the Form 1040 (income tax return).

    As a result, the IRS’s “5329 department” would then send an excise tax bill without any effort to see if the tax had already been included on the 1040 from which the 5329 had been severed.

    In my view, the resulting “double-billing” was tantamount to institutionalized “larceny by trick”.

    This latest announcement indicates that the Service has still not cleaned up its act or otherwise gotten its electronic house in order with respect to the 10% excise taxes owed on early distributions.

    The fact that it must query the taxpayer rather than simply look at the 1099-R and 1040 or 1040NR and/or the 5329 in order to determine if early distribution or excess contribution excise taxes were computed and paid is a confession that they have made little or no progress at electronic matching in this area. They have apparently been unable to electronically integrate their income tax department database with their excise tax department database.

    Nor is it clear why taxpayers with foreign addresses are of any special interest with respect to these excise tax computation and payments.

    The gross distribution – and whether it may be subject to excise tax penalties – is reported by the pension trustee on a Form 1099-R. If that amount plus any other gross reported income reaches a threshold level, it triggers a computerized inquiry for a tax return or a CP2000 and, if that inquiry is ignored, a computerized “substitute” return and demand for payment, levy, etc..

    If the IRS just wants to find out who is living outside the US and receiving pension income I would suggest they start by simply asking Tim Geitner to send a note round to the Defense Department and/or the Social Security Administration asking for a printout of all persons who receive their Military Retirement or Social Security benefits by direct deposit to a foreign bank. (The long list of countries to whose banks these agencies will electronically transfer benefit payments by direct deposit include both Switzerland and (!) the Cayman Islands.)

    Now, THAT would be some evidence that the IRS gives a rat’s patootie about US taxpayers living off the reservation.

  10. @todunsteur, Thank your for publishing this clarification. It does appear that this is a case where within the IRS the right hand does not know what the left hand is doing. I experienced a similar example of this when a couple of years back I donated a portion of my “minmum required IRA distribution” directly by the trustee to a qualified chairity, and so indicated this donation with QCD on my form 1040, exactly in accordance with the instructions. (This form provides no provisions for identifiying the qualified charity). That made it a tax free withdrawal for which I could not claim a charitable contribution deduction.

    Several months later I received a letter from the IRS assessing me $2,985 in tax plus $145 in interest on this tax-free qualified charitable distribution, advising me I had 30 days from the date of the assessment letter to pay or be “subject to additional interest and certain penalties.”

    So I replied with copies of all of the documentation confirming that this distribution had been made directly by the IRA trustee to the qualified US charity, and about 2 months later received a letter stating that no additional payment was due and the matter was closed. I can only presume that this lack of designing the tax form to allow the inclusion of information relating to the charity undoubtedly resuted in hundreds of thousands of similar letters being sent needlessly. Doubtlessly some who received them were panicked into paying the additional amount assesed which they did not owe. This seems to me to be a total waste of IRS resources and taxpayers money making work just to make work. And I live in the US. Pity the poor taxayer who lives abroad who gets IRS assessment letters like this showing a toll free number in the US to call for questions, which is not accessible to callers from outside of the US, even if they are willing to pay for the call.

  11. @todundster, the procedure you suggest for having the Defense Department and Social Security Administration provide this information to the IRS would fill in some of their information gaps, but many of the Social Security recipients abroad are not US citzens and therefore not subject to US taxation. Also some estimates are that as many as half of the US retired abroad do not receive US Social Security benefits becaase they relocated abroad as children with their parents or were born to a US parent abroad and were therefore never covered by US Social Security. A significant number do not even have US Social Security numbers.

  12. Yes, to reiterate Roger’s point, I had found this a while ago, regarding social security benefits and the Canada-US tax treaty:
    The Convention also provides that, except for benefits paid to United States citizens who are resident in Canada, United States social security benefits paid to residents of Canada shall be taxed only in Canada.
    So if you’re Canadian, you’re taxed in Canada on it…

  13. I don’t really care about paying taxes. I already pay a lot. But the US is following me around!!

    This story is as old as time. When the Mongols conquered parts of Europe, one of the first things they established was a poll tax. Countries love people who pay taxes…. why should the US be any different. They think they are so special that we owe them taxes when living for several “uninterrupted” years in other countries.

    @M – best thing to do is renounce or relinquish, even according to their own wording. Why even try to game their system? Those people think that a blue US passport is worth 100x its weight in gold. I think only “we” know a US passport is more of a liability than anything else. So, if we play by their rules, we are “completely” free.

  14. Canadian tax return e-filed April 11. Assessment available online April 12. Refund to be deposited directly April 18!

  15. @ todundsteuer

    “Good comment. I am waiting for that shoe to fall next!”

    ‘If the IRS just wants to find out who is living outside ….send a note round to the Defense Department and/or the Social Security Administration asking for a printout of all persons who receive their Military Retirement or Social Security benefits by direct deposit to a foreign bank….

    Now, THAT would be some evidence that the IRS gives a rat’s patootie about US taxpayers living off the reservation.

    @M,

    Yes, but again, your response about maintaining a US address will also become subject to evasion charges if your purpose to to avoid discovery of your actual foreign residence. I haven’t looked, but I am sure there has to be some $10K penalty somewhere in the tax code for not maintaining a correct residence address, and if not, I am sure Carl Levin is drafting something in his next Son of FATCA amendment.

  16. Agree that US passport is good for destitute person needing a job or government assistance. Not so good for person who already has some wealth and income. Generally provides the “benefit” that if your plane or boat is hijacked, you will be the first person shot. Unless there is an Israeli on board. In which case hijacker will attempt to shoot the Israeli first. Which often ends up poorly for the hijacker.

  17. @Herman, but you need not worry. If your ship is hijacked the US Navy will come to your rescue. That is why US citizens resident abroad are requred to pay taxes because they receive the protection of the the United States when they live abroad, or at least that is what your Congressman will tell you.

  18. Yes, pay up (via FBAR and FATCA penalties) from
    out of your legally earned wages and savings, all post-tax (country of residence) – whether you owe zero US tax or not –
    that’s a minor quibble to the US. ‘Protection’ money extorted by threats of criminality and persecution/prosecution. And the exit tax – more ‘protection’ money.
    Meanwhile, I’d like to know just how many of those ‘terrorists, money launderers and ‘evaders’ have been paying up their FBAR and FATCA penalties?

  19. @Deckyard1138, Yes, you pay UncleSam protection money but how much do you get? Zero. If the Embassy arranges your evacuation from a danger zone you will pay the commercial air fare for that evacuation. That’s the law. There is no free lunch for the taxpaying American citizen abroad. Your taxes don’t count.

  20. The IRS is like the math teacher that won’t give you cderit for the right answer on the test unless you show your work. Stock funds have shares with prices that fluctuate. So you do have to report your sales on Schedule D, showing both the gross proceeds and your basis in the shares sold. If you did not do that, you probably need to file an amended return with a Schedule D laying out your computations of profit and also the length of the holding period. (You may even get a bigger refund, if you declared the profit as ordinary income when it was really long-term capital gains taxed at a lower rate.) I believe things also can go wrong if the number you entered for your sale proceeds doesn’t match the notice that the brokerage sent to the IRS or (if you did not file electronically) the person entering your return mistyped the number.If I may borrow your soapbox once again, one other general piece of advice (which it sounds as if you followed, given that you were ready with the documents in half an hour!): if you receive an IRS notice, make responding to it a very high priority. Do not leave it aside with the idea you’ll get to it when convenient. There are deadlines, and missing them can leave you screwed. Paying the extra three bucks for certified mail when you reply is not a bad idea. If either the IRS or USPS loses your reply, you bear the burden of proof to show you responded in a timely manner. A certified mail receipt with legible postmark satisfies that burden.

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