The Big Gap ? – How U.S. Citizens and LPRs Residing in the U.S. versus those Living Outside the U.S. File U.S. Tax Returns.
The U.S. worldwide taxation system of U.S. citizens and LPRs causes much confusion. It is unique in the world as most all other countries only impose worldwide taxation on their residents. See, . “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.
These U.S. citizens and LPRs living outside the U.S. have (at least prior to FATCA) little third party reporting of income directly to the IRS. There are numerous government reports that demonstrate that when third parties (e.g., banks, tenants, securities brokers, credit card companies, real estate sales transactions, etc.) report the income of a particular transaction to the government, the voluntary compliance of taxpayers increases significantly. See, OECD FORUM ON TAX ADMINISTRATION: COMPLIANCE SUB GROUP
and the U.S. GAO-12-342SP: General government: 44. Internal Revenue Service Enforcement Efforts which highlights that the ” . . . where IRS can improve its programs which can help it collect billions in tax revenue, facilitate voluntary compliance, or reduce IRS’s costs. These include pursuing stronger enforcement through increasing third-party information reporting . . . Expanding third-party information reporting improves taxpayer compliance and enhances IRS’s enforcement capabilities. The tax gap is due predominantly to taxpayer underreporting and underpayment of taxes owed. At the same time, taxpayers are much more likely to report their income accurately when the income is also reported to IRS by a third party. By matching information received from third-party payers with what payees report on their tax returns, IRS can detect income underreporting, including the failure to file a tax return.”
The current trend of worldwide reporting of assets and income via FATCA and the OECD programs is designed to accomplish just this; increase information reporting by third party payers (e.g., principally from foreign financial institutions) directly to the IRS and tax revenue authorities around the world to deter U.S. citizens and LPRs living outside the U.S. from under-reporting or not reporting at all their income on their U.S. income tax returns.
Traditionally, there were limits on the law and the jurisdictional authority the U.S. government had to require non-U.S. institutions to report non-U.S. source income directly to the IRS. This has changed significantly now with FATCA, which started in earnest this year, in 1 January 2014. See,