The Internal Revenue Service recently announced a program that will measure payment, filing and reporting compliance by United States citizens who live outside the United States. Currently there is no specific data to indicate the gap between taxes that should be paid and taxes that are being paid by expatriates.
How Does the Internal Revenue Service Obtain Information About Foreign Source Income of U.S. Citizens?
While the Internal Revenue Service does not generally receive Form W-2’s, Form 1099’s and broker statements from Americans living abroad they do have several means by which they can secure information on foreign source income.
The United States has over 60 bilateral tax treaties with other countries and over 20 Tax Information Exchange Agreements in effect with countries where a bilateral tax treat is not in place. These treaties and agreements facilitate the exchange of information and generally allow mutual assistance for both civil and criminal investigations. The tax treaties allow for information exchange by specific request, in most cases, through spontaneous and automatic exchanges as well.
Specific requests allow treat partners to request and exchange information relative to a specific tax investigation or tax administration matter. A spontaneous exchange allows a country to spontaneously share information relative to tax administration that might be of interest to its treaty partner, even when a request has nor been made. And the automatic exchange program allows treaty partners to routinely share information they maintain about income sourced in one country and paid to a resident of the other treaty partner country.
Does this actually happen? About 20 years ago I attended a conference in Europe composed of a senior tax official from each European country and the Internal Revenue Service. This topic came up and the tax official was asked how many “spontaneous exchanges” were made with the Internal Revenue Service that year. His response was, “about 80,000.” This was a drastic amount from a country that the United States had little trade with. Today, this number must be in the hundreds of thousands.
A few months ago there was an article about a Swiss bank that had a program in place to assist Americans in minimizing their United States income taxes. When news of this scheme broke the Swiss bank refused to communicate with the Internal Revenue Service citing Swiss Bank Secrecy Laws. A week or so later the Swiss bank announced their willingness to provide the Internal Revenue Service with whatever information they needed. Undoubtedly the Internal Revenue Service relied on the United States/Switzerland bilateral tax treaty to obtain this information.
The United States has a bilateral tax treaty with Bermuda and Article 5 requires mutual assistance in tax matters.
2009 Tax Law Changes
It is a given that in 2009 Congress needs to permanently fix the alternative minimum tax, resolve the estate tax rules which are due to expire in 2010 and to make permanent the Bush tax cuts of 2001. All of these measures will reduce taxes. The need for revenue offsets to these tax cuts will be in the tens of billions of dollars. Thus, prior to year end it would behoove a taxpayer to do tax planning for both 2008 and 2009.
2010 Tax Law Changes
In 2010 the current 15% tax rate on long term capital gains is due to expire. We are unaware of any tax professional who does not expect this rate to increase to 25% or 28%. While portfolios may currently be depressed, individuals should start to seriously consider selling appreciated securities to take advantage of the current 15% tax rate.
Charitable Contributions
The Internal Revenue Service is aware that this deduction is ripe for abuse. Current tax law requires a written acknowledgment for gifts made of over $250. In a recent Tax Court case the Internal Revenue Service denied a deduction of $6,000 for taxpayers who were tithing to their church, even though the church was a bona fide charity and the taxpayers were able to produce 10 cancelled checks each in the amount of $600.
If you are deducting donations of household goods or used clothing worth over $500 you must attach an appraisal to your return or the Internal Revenue Service will deny the deduction.
How Do Your Deductions Measure Up to the National Average?
The following averages are based on tax returns filed in 2006.
Taxable Interest State and Charity
Income Expense Local Taxes .
47,161 9,813 3,100 2,673
98,188 12,892 6,139 3,860
519,436 23,274 30,597 18,539
A basic tax strategy has always been to defer income and accelerate deductions. However, it is very likely that tax rates will substantially increase in 2009 and individuals should consider accelerating income to have it taxed at the existing lower tax rates in 2008.
|