Where the IRS will likely look overseas: USCs are Millions Yet U.S. Tax Returns are Just a Few Hundred Thousand
The IRS has key tax return filing information in their current records; pre-FATCA flow of financial information. Various reports indicate there are probably around 6-7 million U.S. citizens residing overseas, although there is no certainty in these numbers. See, Taxpayer’s Advocate Annual Report of 2012 – that discussed both the number and type of individuals overseas, and potentially unidentified individuals.
The IRS tracks and keep information on U.S. income tax returns filed by U.S. individual taxpayers overseas.
The information is not only the number of tax returns (head count), but also the amount of income reported. For instance, TAS reported about 700,000 returns were filed in 2010 by U.S. taxpayers abroad, while estimating about 6.32 million U.S. citizens reside abroad. See, p. 37 of the Taxpayer’s Advocate Annual Report of 2012 –
These numbers do not even try to quantify the number of lawful permanent residents (“green card holders”) who reside around the world, who are not filing U.S. income tax returns. In 2012, the estimated number of LPRs was 13.3 million as reported by the Office of Statistics of the DHS. See, Estimates of the Legal Permanent Resident Population in 2012
How many of these LPRs are living outside the U.S. and not filing or reporting their worldwide income on U.S. income tax returns?
In addition, for the tax year 2011, the IRS Tax Statistics (“SOI”) in the “SOI Tax Stats – International Individual Tax Statistics” reported that only about 450,000 returns were filed with the foreign earned income exclusion. See, The Foreign Earned Income Exclusion is Only Available If a U.S. Income Tax Return is Filed
A detailed report of these statistics commissioned by the IRS and prepared by Scott Hollenbeck and Maureen Keenan Kahr titled Individual Foreign-Earned Income and Foreign Tax Credit, 2011 provides numerous insights about the likely under reporting and non-filers of U.S. income tax returns.
This report provides the following information reflecting the UK as the number one country with foreign earned income (Section 911) followed by Canada. Ironically Afghanistan (presumably due to the U.S. citizens working in that country as a result of the war?) is the country in the 4th location, ahead of Hong Kong and Japan.
Noticeably absent from that graph is Mexico, which reportedly has the largest number of U.S. citizens residing in any particular country. Canada is the second most populated country with U.S. citizens according to numerous reports.
Only about 46,000 returns were filed by Canadian residents claiming the foreign earned income exclusion, and even more surprising are the mere 7,000 returns from Mexican based U.S. taxpayers. See Table 2 of the report – Individual Foreign-Earned Income and Foreign Tax Credit, 2011
These are the two most populated countries with U.S. citizens.
As the IRS receives information around the world from governments and financial institutions via FATCA, of U.S. citizens and their bank accounts, it will be fairly easy for them to start targeting certain countries and commence tax audits against residents in those countries.