(Bloomberg) – The roughly 8 million Americans who live abroad automatically get a couple additional months each year to file their taxes. Don’t expect them to be grateful.
Filing to the Internal Revenue Service from overseas is more confusing, complicated, and expensive than it is for Americans at home (and that’s saying something). Unlike almost every other country in the world, the U.S. demands its citizens pay taxes on all foreign income. They must file even if they have lived and worked abroad for decades, and even if they’re already paying hefty taxes to the countries where they reside.
Now it’s getting worse. In an effort to fight tax evasion, the IRS recently began forcing expatriates to report not just their income, but additional information on savings and investments — rules that have made it harder to open bank and brokerage accounts overseas. More ominously, the IRS and the State Department are also implementing a provision approved by Congress in December that could revoke the passports of Americans who owe too much–raising the prospect of being stranded abroad on account of poor arithmetic.
“A lot of people are very, very angry about the whole situation,” said David McKeegan, co-founder of Greenback Expat Tax Services, which specializes in U.S. international tax preparation. For Americans abroad, he said, “It’s very easy to feel like you’re a criminal [for] doing normal things.”
Here are several of the biggest problems U.S. citizens face:
Lynn Milburn spends months worrying about her U.S. taxes each year, even though she never owes anything in the end. To be fair, the IRS often excludes the first $100,000 in foreign earnings, along with some housing expenses. It also lets Americans deduct some of the taxes they pay to local governments, which usually levy at higher rates than the U.S. does, especially in such places as Western Europe, where most expatriate Americans live. After that, however, it’s open season.
Milburn, 57, has lived overseas most of her adult life. Originally from Seattle, she recently moved from Australia to France. “Every time my situation changes, I’m not sure where I stand,” she said.
Milburn said she is “petrified” of being fined; although she keeps her financial life very simple, filling out the forms correctly can be a challenge. For example, while the IRS asks about income from January to December, Australia’s tax year runs from July to June. Let the migraine begin.
A typical U.S. tax return for Americans living in the U.K. is 40 to 50 pages long, even though they often end up owing nothing, according to Robyn Limmer, head of tax at Frank Hirth, an accounting firm based in New York and London that specializes in cross-Atlantic tax issues.
And before you can say H&R Block, it bears noting that hiring a tax preparer who understands how to file from abroad isn’t cheap. “Many people have to pay thousands of dollars just to show they owe no money to the IRS,” said Keith Redmond, 51, an American who has lived in Paris for 16 years.
Lost in translation
How do you say “tax-deferred retirement account” in Turkish or Thai?
Every country has its own way of taxing income, savings, investments, and pensions, sometimes making it impossible to explain to the IRS what’s going on. Tax treaties can help specialists navigate some of these issues, but these agreements can be enormously complicated and maddeningly vague. Limmer said that even in the U.K.—where “at least we share a common language”—accountants can disagree with each other on how to sort things out, especially in the “particularly tricky” area of pensions.
Milburn isn’t an accountant or lawyer, but she has noticed the same thing: “I actually don’t think that the IRS or tax professionals necessarily know 100 percent what to do. I think it’s always a bit of a gray area. Because how can you convert something in another country to a U.S. equivalent?”
IRS agents stationed at U.S. embassies used to be able to help, but budget cuts forced the agency to close the last of those offices (in London, Paris, and Frankfurt) last year.
Because the rules are so confusing, some say they often end up being taxed unfairly, paying the IRS and their home country on the same income. Brian Krahmer, 40, a Minnesota native who moved to Germany in 2014, must pay U.S. self-employment tax on his freelance income — though the work, mostly software development, is for German companies.
“If I’m already filing a German income tax return on the money earned, I don’t see any fairness from also having to file in the U.S.,” he said.
The rules can feel unfair, even when they don’t technically result in double taxation. For example, the IRS demands that Americans pay capital gains taxes on sales of homes in the U.K. — gains that can be greatly inflated by currency swings. The U.K. doesn’t have the same tax, but it does impose a tax on home purchases. An American in London who wants to move has the pleasure of paying both.