The IRS "War On Expats

This article from Heartlander is from July, 2014, but it was the best explanation I have seen. I am not aware of any significant changes since mid-2014.
Heartlander article

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Nataly Elena 1 wrote:

The IRS War on Expats...Does anyone know what this means for ALL AMERICAN EXPATS?

It doesn't affect "ALL" U.S. Expats, at least not yet.  An expat living on Social Security below a certain amount does not even have to do an IRS tax filing.  Check at irs.gov if you don't know whether you fall under the threshold.

It IS making it more difficult to open accounts for Expats living abroad -- both accounts with some banks and foreign financial institutions that don't want to tangle with the IRS and its fancy FATCA compliance rules....and accounts inside the U.S. for Expats without an acceptable U.S. residential address.  Trading accounts are also affected.

Whether a specific bank or institution will accept a $15-a-month mail-forwarding-only address for a new account may depend on how sophisticated their software is in detecting a non-residential address.

An Expat trying to maintain a U.S. bank account after moving overseas might not be impacted if they do not notify the bank of an address change and keep their account as electronic only (no snailmail).

cccmedia in Quito

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cccmedia wrote:

Nataly Elena 1 wrote:

The IRS War on Expats...Does anyone know what this means for ALL AMERICAN EXPATS?

It doesn't affect "ALL" U.S. Expats, at least not yet.  An expat living on Social Security below a certain amount does not even have to do an IRS tax filing.  Check at irs.gov if you don't know whether you fall under the threshold.

It IS making it more difficult to open accounts for Expats living abroad -- both accounts with some banks and foreign financial institutions that don't want to tangle with the IRS and its fancy FATCA compliance rules....and accounts inside the U.S. for Expats without an acceptable U.S. residential address.  Trading accounts are also affected.

Whether a specific bank or institution will accept a $15-a-month mail-forwarding-only address for a new account may depend on how sophisticated their software is in detecting a non-residential address.

An Expat trying to maintain a U.S. bank account after moving overseas might not be impacted if they do not notify the bank of an address change and keep their account as electronic only (no snailmail).

cccmedia in Quito

And most expats are better off keeping their money in a USA bank (FDIC protection up to $250,000) and transferring in what they need when, perhaps once a month.  Don't be fooled by high local interest rates, for the risk is not worth it.  USA citizens have always been required to report and pay income tax on their worldwide income, with under certain amounts not required to file at all.  In addition, living more than 270 days out of the USA is an exemption from the whole Obamacare reporting and penalty paying process.  With the IRS budget being constantly cut, they are actually less informative and doing less audits than in previous years.

A decade ago, only a few hundred U.S. taxpayers renounced their citizenship during the course of one year.

Last year, that number was up to 3,415, according to IRS records reported at the International Tax Blog.  And that's three times the number from 2012, two years earlier.

Renouncing is not an easy matter -- it involves multiple interviews and plenty of paperwork -- but it's how to avoid tax liability for many Expats who have significant worldwide income.  Experts say that avoidance of U.S. taxation has been the main reason for renouncing.

The IRS boosted the one-time fee for renunciants from $450 to $2,350 last year.  However, the higher fee is financially worth the cost for thousands of wealthier individuals.

Out of a U.S. population of hundreds of millions, it's a small percentage who renounced last year.  But with exponential growth, the number of renunciants could be significant in years to come.

cccmedia in Quito

cccmedia wrote:

A decade ago, only a few hundred U.S. taxpayers renounced their citizenship during the course of one year.

Last year, that number was up to 3,415, according to IRS records reported at the International Tax Blog.  And that's three times the number from 2012, two years earlier.

Renouncing is not an easy matter -- it involves multiple interviews and plenty of paperwork -- but it's how to avoid tax liability for many Expats who have significant worldwide income.  Experts say that avoidance of U.S. taxation has been the main reason for renouncing.

The IRS boosted the one-time fee for renunciants from $450 to $2,350 last year.  However, the higher fee is financially worth the cost for thousands of wealthier individuals.

Out of a U.S. population of hundreds of millions, it's a small percentage who renounced last year.  But with exponential growth, the number of renunciants could be significant in years to come.

cccmedia in Quito

So you think in 2016 over 10,000 will renounce?  Even if they would, it is significantly less than the number of new millionaires created every year.  Of course its all about taxes, so only the very rich will be doing this, yet IL is selling it as a great way to pay no income taxes.  Anyone know any economic refugees in Ecuador who have renounced their USA citizenship?  I doubt it, it is a non-issue.  The renouncers just used to not report foreign income or accounts, but with the actual laws now being enforced, they are paying what it takes to come out ahead financially, this has nothing to do with most all expats nor is it changing the lives of the renouncers other than not sweating the IRS in the future.

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From what we have read it affects folks with large sums of money in banks here. Our land lord is an executive for Banco del Austro, he told us they are not doing anything. Only thing they would do at this point would take your social security #, and sent to the IRS, but they are just sitting on this. He told us not to worry. I might add we do not have a large amount of money, and do not work here. Also, our social security checks go to our US bank. We have Banco del Austro for SRI refunds, n to pay IESS, n Direct TV. Worst that could happen is the bank will ask for a tax return.

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Lizardo wrote:

He told us not to worry....Worst that could happen is the bank will ask for a tax return.

Really?

As someone who has survived an IRS audit, I believe there could be ramifications more serious than a simple document request.

'Don't worry, be happy' is questionable advice IMO in dealing with the IRS and U.S. tax requirements.

cccmedia in Quito

We too had a tax audit, in 1988! My comments are strictly based on my own experience,  here. We have been retired three years, n honestly do not have to do tax returns anymore. Our income is taxed on 50% of our social security, which is too low to owe. IRS confirmed that, as did our accountant, in California. Your situation is most likely 100% different than ours. You do not have to be present for a tax audit, you send your accountant, in the US. I hope you never have to worry about that.

Everyone's situation is different. I've had social security disability funds garnished for an "overpayment" Checks being sent to an old address. It was finally resolved with the help of a senator. I worry more about SSA than IRS!!!!!!

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suefrankdahl wrote:

Everyone's situation is different. I've had social security disability funds garnished for an "overpayment" Checks being sent to an old address. It was finally resolved with the help of a senator. I worry more about SSA than IRS!!!!!!

Now if you sign up for SS benefits you MUST have it direct deposited into an account, should eliminate most problems mentioned.  A couple over aged 65 with no other income but SS will not be owing any income tax, does not have to file until 50% of SS benefits plus other income exceeds $32,000 in total, and even then could owe no tax.

Nataly Elena 1 wrote:

Hola Sue; Good to know. Take care   Nataly

Ah yes, the bliss of not being understood

Your funny, it was 1988. We have no deductions to audit. We get an annual letter from S/S we do not have to file. IRS has our po box in Calif. They send our mail there, they know we live in Ecuador.

So, what if you're on social security disability and don't make enough to have to file a tax return, but have a small lump sum (say, from the sale of your house), of about $25,000 or $30,000?  If you're not required to file because of your low income, do you still need to report the lump sum?   And, how much would taxed be (about) on that amount of money?  I heard some where that if you put the money in an account that is NOT in a bank, you don't have to report it?  Is that true?  Thanks, Kelly

Wouldn't that depend on it being a rental, or your home sale? You do not pay taxes on sale of your residence, up to $500,000?, as a couple,( proceeds), if you owned it for specified years, n did not report as a rental. But you need to have an accountant answer your questions. From what I understand, or don't,  the IRS wants to know about the expats with income, here, and large interest income, that they do not report on their tax returns, since they are for all purposes American citizens. You can take the expat out of America, but you can't take the IRS out of your pocket 😡 :so sad:

So, if I sell my home here (the US) and move to Ecuador, I don't have to pay taxed on the money I make from the sale of the home (what's left after I pay off the house)?  It's not a rental property, it's just my house.

OrganicMom wrote:

So, what if you're on social security disability and don't make enough to have to file a tax return, but have a small lump sum (say, from the sale of your house), of about $25,000 or $30,000?  If you're not required to file because of your low income, do you still need to report the lump sum?   And, how much would taxed be (about) on that amount of money?  I heard somewhere that if you put the money in an account that is NOT in a bank, you don't have to report it?

It seems unlikely that Expat.com posters can sufficiently analyze the minutiae of your house-sale income and offsetting factors and reliably advise you, without asking more questions.

Sue is right:  everybody's situation is different.  Lizardo is right:  ask an accountant.  With up to 30K in proceeds from the house, you likely have enough to do the right thing.  H&R Block's nationwide-average fee is under $200.  (source:  CBS News Moneywatch, Feb. 2015). 

No promises, but it's likely a competent accountant can deduct away practically any capital gains on 30K primary-residence-sale income.

As to the last question about avoiding tax liability by not putting proceeds in a bank:  one might reduce liability by buying new property within a certain time limit.  But that strategy doesn't seem to apply in your case.

cccmedia in Quito

OrganicMom wrote:

So, if I sell my home here (the US) and move to Ecuador, I don't have to pay taxes on the money I make from the sale of the home (what's left after I pay off the house)?  It's not a rental property, it's just my house.

Moving to Ecuador would not reduce any tax liability from the sale of your house.

As mugtech stated, the U.S. taxes the worldwide income of its citizens.

cccmedia in Quito

The gain on the sale of a residence which was your primary residence for at least two of the previous five years can be excluded up to $250,000, $500,000 for a couple.  The gain is based on the sales price of the residence minus what you paid for it originally minus cost of sale.  Any improvements, not repairs, can also be deducted as cost basis for the house.  This does not include the paying off of any loans against the property.  The way it must be reported on a tax return is to list the gross sales price per the settlement sheet, minus the cost basis to show the gain, and then the amount of the gain, usually all of it, to be excluded.  In most cases this will be entirely excluded and no taxes will be due.  It is highly recommended that a tax return be filed that year even if without the sale a return would not be required.  The settlement may result in a form 1099 being issued which lists the proceeds only.  If you do not file a return to show the cost basis and exclusion, the IRS will send you a new tax proposed modification, showing no cost basis or exclusion, the entire proceeds being taxable.  At that point you can get them to accept that it was not a taxable transaction, but you will have to provide them with all the information required on the original tax return.  So much easier to get it right the first time.   IRS always assumes worst case basis for the taxpayers until they are corrected.  I am willing to answer any questions on this topic, cccmedia is correct in suggesting you pay a tax preparer to file your return in the year of house sale.

No not if you've owned your house for five yrs? Not sure it could be less time. The money you put in any bank here with the interest added to your social security it would still be below the tax limits. You can call the IRS and they will answer your questions.

Thanks Mugtech.  A little of that was over my head, lol, but I'm not sure when exactly I'll be moving, so it if necessary, can I file all this from Ecuador?  Kelly

OrganicMom wrote:

Thanks Mugtech.  A little of that was over my head, lol, but I'm not sure when exactly I'll be moving, so it if necessary, can I file all this from Ecuador?  Kelly

Yes, you can file your US tax return, form 1040, from Ecuador no problem.  I know of expats in Cuenca who will help you file on line.

Lizardo wrote:

No not if you've owned your house for five yrs? Not sure it could be less time. The money you put in any bank here with the interest added to your social security it would still be below the tax limits. You can call the IRS and they will answer your questions.

You only have to have used the house 2 of the previous 5 years as your main residence, so if you lived there for more than 2 years you could move to Ecuador and sell the house 2 years later and still get the full exclusion.

Thanks.  Yes, I've owned it for about 5 1/2 years.

Great.  Thanks.

Mugtech, Can I just let my SSD payments continue to be deposited in my bank in the US and withdraw the money from Ecuador as I  need it, and is there a fee to withdraw the money from there?  And, then if I decide later to take all of my money out of the bank in the US and put it in one in Ecuador, can I do it from there?

OrganicMom wrote:

Mugtech, Can I just let my SSD payments continue to be deposited in my bank in the US and withdraw the money from Ecuador as I  need it, and is there a fee to withdraw the money from there?  And, then if I decide later to take all of my money out of the bank in the US and put it in one in Ecuador, can I do it from there?

Many expats keep their money in USA banks because of the FDIC insurance on $250,000 per bank.  They open an account in Ecuador and transfer money as needed, perhaps once a month.  The people in Ecuador right now could tell you about the fees involved.  Keep in mind that if your balance in all your foreign accounts on any one day exceeds $10,000, then there is extra paperwork which most be completed and e-filed by 6/30 of the following year, even if you are not required, by income, to file a 1040 income tax return.  If you go for an investor visa you will need to invest $25,000 in Ecuador, but I would assume your SSD would be more than  $800 plus another $100 for each dependent so you could obtain a pensioner's or retirement visa.
Good luck

Thanks for all the great info.  Are you an accountant?  I just read that the dollar is going to collapse or something like that and that you should put money into another currency.  What do you think of that?  If I'm asking too many questions, just let me know....

OrganicMom wrote:

Thanks for all the great info.  Are you an accountant?  I just read that the dollar is going to collapse or something like that and that you should put money into another currency.  What do you think of that?  If I'm asking too many questions, just let me know....

The dollar may collapse or "something like that" but it may not come anytime soon.

You are aware that Ecuador operates on the US dollar currency?

The dollar probably will collapse one day if the same economic foolishness continues to be implemented by the U.S., but that day is unlikely to be anytime soon. For the U.S. dollar to collapse you need to have a viable alternative currency that is extremely liquid. As much as some people love to talk about the collapse of the U.S. dollar, they fail to ever mention what will take it's place, and for all you gold bugs, I'm sorry but it's not going to be gold.

Secondly, even if you wanted to diverse into other currencies, it's by in large impractical now with FATCA, and what currency would you want? Euro, Yen, Pound, Ruble, Real, Yuan, or one of the many others. None are that particularly attractive. The dollar might not be super attractive, but is fortunate, in that, the others suck worse.

OrganicMom wrote:

Thanks for all the great info.  Are you an accountant?  I just read that the dollar is going to collapse or something like that and that you should put money into another currency.  What do you think of that?  If I'm asking too many questions, just let me know....

Guilty as charged.
Be careful of such talk, it is usually by someone trying to sell you something.
Not possible to ask too many questions, but there may not always be answers.

OrganicMom wrote:

Mugtech, Can I just let my SSD payments continue to be deposited in my bank in the US and withdraw the money from Ecuador as I  need it, and is there a fee to withdraw the money from there?

I prefer to have my SS check direct-deposited into my bank in Ecuador, Banco de Guayaquil.   They charge several dollars a month to do this, but it is a smaller charge than either of my debit-card-connected U.S.-based banks would charge at an ATM, and also avoids the $1.50 per-withdrawal fee charged additionally by Banco at Ecuador ATMs.

The U.S. Embassy in Quito will assist you in transferring your Social Security payments to an EC bank once you have obtained your national ID card and opened a bank account here.

For multiple reasons I do not plan to close my North American bank accounts.

cccmedia in Quito

OrganicMom wrote:

if I decide later to take all of my money out of the bank in the US and put it in one in Ecuador, can I do it from there?

You have likely decided by now not to take all your money out of the U.S. bank or close that account.

However, you may want to transfer a lump sum to an Ecuador account now and again after you are in EC and have set up that account.

I recommend that you speak to a banker at your current bank to discuss whether and how that will be possible, and if it is, to sign any required papers before you move.

It can be tricky and/or expensive to attempt to wire money from the U.S. if you are outside that country.  Different banks at both ends have varying rules.

cccmedia in Quito

The IRS is out to get anyone they can they need money. They will go after the little people just like the article states.I know for a fact because I was a target for them. I have lived in Cuenca for 5 years. When I moved here I closed all my accounts in the U.S. Then after three years I get a notice about deliquent taxes owed. about 1.2 million for 2005 2006. I thought it was a joke at first.
I have been trying to deal with them and have had to spend thousands of dollars on a tax attorney to prove I dont owe this. Will they give me back my money for damages? NO they dont have too. The are exempt from being sued for  false accusations. They have done this to three people I know so far living abroad. The funny thing is they agreed to settle with me for 10% which would be 120,000. Why would they wipe out 900,000 if it is truly owed to them? For me to have owed that much I would have had to make millions....I WISH. BEWARE OF THE IRS. I am ready to give up my citizenship. They have caused so much stress in my life because of this. Put liens on my houses in the states how much more can they do to people. The government is in financial trouble so being a U.S citizen living abroad you are a great target for them.