Bloomberg Tax is reporting a nearly 50% increase in the number of Enrolled Agents with foreign addresses. The article is troubling on many levels, starting with the title: “U.S. Tax-Dodging Crackdown Overseas Brings Foreign-Adviser Surge.” Apparently, the editorial team at Bloomberg has different ideas, because today they published “Stop Treating American Expats Like Tax Cheats.”
FATCA is truly the full-employment act for the tax compliance profession. Below the fold, I’ll examine the following issues raised by the increase in US tax compliance professionals outside of the US:
- Has the IRS really “gone global”?
- What support does the IRS provide international taxpayers?
- Who can prepare tax returns?
- What is an Enrolled Agent?
- What to look for in a tax preparer
Has the IRS really “gone global”?
With FATCA, Uncle Sam now knows your every financial move outside of the US – or so it seems. Hundreds of thousands of bank records are flowing into the IRS from Australia, Canada, Israel, and the rest of the world. But the IRS is having trouble dealing with this quantity of data. If the IRS ever manages to match FATCA records to tax returns, they will still have difficulty forcing compliance on those with little or no real connection to the US. Yes, as reported in the Bloomberg article, they can deny US passports to those with seriously delinquent tax debts – but they have to know what the tax debt is to do this. Most US tax returns filed from outside of the US have zero tax due after application of foreign tax credits. However, getting to the correct result is not easy because the US tax rules for “foreign” investments, savings, and businesses are far more complex than the tax rules that apply to similarly situated US residents. For many, the real cost of filing US taxes from abroad is the opportunity cost of not being able to save or invest under the same rules as your neighbours. Often, compliance with US tax law is just the first step on the road to renouncing US citizenship.
What support does the IRS provide international taxpayers?
Since the most complex provisions in the tax code apply to international taxpayers, you might think that the IRS would provide sufficient support to make compliance possible. Unfortunately, this is not the case. The IRS closed the last of its international assistance offices in 2015. Taxpayers with questions must phone the IRS, and hope that the agent on the other end of the line is able to answer questions on international tax law. Congress added a Taxpayer Bill of Rights to the tax code, but US expats are often short-changed when it comes to obtaining clear explanations of the law or quality service. In its organization chart, the IRS combines all international taxpayers under a single division (Large Business and International). Often the forms and instructions for the international issues affecting US citizens abroad appear to be pitched at corporate tax lawyers rather than ordinary individuals.
This lack of support and the complexity of the law mean that taxpayers are practically forced to hire expensive tax preparers to handle their US tax compliance. Essentially, the IRS is forcing taxpayers to pay personally for the type of support normally provided by the IRS for domestic taxpayers.
Who can prepare tax returns?
Just about anyone can hang out a shingle as a US tax preparer. There is no official vetting of preparers by the IRS, though paid preparers are required to get a preparer tax identification number (PTIN) and can be barred for misconduct. All paid return preparers are governed by the IRS regulations found in Circular 230. These regulations require preparers to ensure that any position taken on a tax return is a reasonable interpretation of the law.
Some tax preparers can represent you in front of the IRS – that is, they can call the IRS on your behalf, represent you in an audit, and help resolve payment or collection issues. Three types of credentials allow unlimited representation rights: attorneys, CPAs and Enrolled Agents. None of these credentials ensures that the professional understands the complex international tax rules that apply to the foreign source income of Americans abroad. However, attorneys and CPAs have stringent education requirements and should be able to read and interpret the underlying law.
What is an Enrolled Agent?
An Enrolled Agent (EA) is a certification granted by the IRS. To become an EA, you must pass three exams covering Individual Tax, Business Tax, and Tax Procedure. Each exam consists of 100 questions and takes 3.5 hours. To get an idea of the detail required, look at the sample questions for part 1 (individuals). Many of the topics covered are irrelevant to someone living and working outside of the US. An EA with no other qualifications has generally learned about US tax law by reading IRS publications and study guides rather than going to the actual legislation. They are experts at knowing how the IRS interprets the law.
But in the US tax system, the IRS is not the only source of interpretation. Taxpayers and their representatives can disagree with the IRS. They may even be able to persuade an IRS auditor. If they are unable to convince the IRS of their position, then they can take their dispute to the courts. The IRS does not win every case. The area of tax law most open to interpretation is the US tax treatment of foreign assets, investments, or businesses. Rarely do foreign entities fit neatly into US classifications. Understanding what constitutes a trust under US tax law, for example, can make a big difference in how specific assets or transactions are reported.
What to look for in a tax preparer
So, if you want to comply with your US tax reporting obligations, what should you be looking for? Ideally, you will want someone qualified in both the US and your country of residence. Too often a US-centric tax adviser will not consider the very real tax consequences where you live. Plus, you need someone who truly understands how your local investments (superannuation, managed funds, etc) are structured under local law – as this will have some bearing on the US treatment. You want someone who is educated and qualified to read and interpret the law for you – with your interests in mind. You probably don’t want someone who learned international tax by reading Publication 54.
There are a lot of articles that seem to have been written by the tax compliance industry to scare people into compliance. Only about 15-20% of nonresident US citizens actually file US tax returns. Those who are currently non-compliant should do their homework before consulting with a tax compliance professional – make sure you know what you’re getting yourself in to. If you decide compliance is your best action and you are not confident enough to prepare your return on your own, choose a professional very carefully.