Tax-Expatriation

Where the IRS will Likely Look in Latin America: Country Specific Tax Returns filed by U.S. Individual Taxpayers – Latin America (Excluding Mexico)

Posted on February 5, 2015

The prior post asked the “question”: Where the IRS will likely look overseas: USCs are Millions Yet U.S. Tax Returns are Just a Few Hundred Thousand [?]

As a continuation of the prior post, some further analysis by geographical region is provided here.  This post is focused on Latin American countries where U.S. citizens, lawful permanent residents (“LPRs”) or other individuals who may be U.S. tax residents (e.g., those individuals who make an election to be treated as a “U.S. person” for federal income tax purposes) are or are not filing U.S. tax returns.  For an important discussion of LPRs, see,  Who is a “long-term” lawful permanent resident (“LPR”) and why does it matter?

The IRS provides detailed statistical information on tax returns filed; how many, and in various groupings and from various locations.  One such grouping by the IRS office of statistics, is by those individuals who filed tax returns which contained the “foreign earned income exclusion” which is reported on Form 2555: Foreign-Earned Income Exclusion, Housing Exclusion, and Housing Deduction.

See, The Foreign Earned Income Exclusion is Only Available If a U.S. Income Tax Return is File

The IRS reports that less than 15,000 tax returns were filed from all of of Latin/South America (excluding Mexico); for the year 2011, the last year they reported these statistics reflecting the foreign earned income exclusion.  One of the more surprising statistics is that according to the U.S. Department of State, some 120,000 U.S. citizens reside in Costa Rica alone, yet only about 2,100 U.S. income tax returns were filed from Costa Rica with the foreign earned income exclusion.

Indeed, according to the U.S. federal government’s own numbers, there are approximately more than 8 times the number of U.S. citizens, simply living in Costa Rica  (approx. 120,000) compared to the total number of U.S. tax returns (14,732) filed from all of the Latin/South American countries (excluding Mexico) that had the foreign earned income exclusion.

Similarly, Panama according to the U.S. Department of State, has ” . . . About 25,000 American citizens reside in Panama, many retirees from the Panama Canal Commission and individuals who hold dual nationality. There is also a rapidly growing enclave of American retirees in the Chiriqui Province in western Panama.”  However, only about 1,200 U.S. income tax returns were filed from Panama with the foreign earned income exclusion.

Each Latin/South America country from which the number of U.S. tax returns were filed in 2011, with the foreign earned income exclusion is set out below:

This analysis is surely the type of analysis being conducted by the IRS which will be supplemented with information as they start receiving financial account and income information from countries and their financial institutions around the world (not just Latin America) from FATCA and the IGAs.  See,  Part 1- Unintended Consequences of FATCA – for USCs and LPRs Living Outside the U.S.

Three key observations about the above analysis.

First, there are many U.S. citizens residing overseas who have (a) income below certain thresholds, (b)  are simply retired or unemployed – and have no foreign earned income, and/or (c) are not aware of how they can benefit from the foreign income exclusions; and therefore are not filing U.S. tax returns with the foreign earned income exclusion.  However, the disproportionate number of U.S. citizens living throughout Latin America compared with the tax returns that are filed in this category is a strong indicator of low compliance by these taxpayers.  The IRS will surely take note of this key consideration.

Second, the above numbers do not try to identify the number of LPRs who are residing in these Latin American countries who are also not filing U.S. income tax returns.  There are some 13-14 million LPRs.  See, What are the Number of LPRs who Leave U.S. Annually without filing Form I-407 – Abandonment?

Third,  Latin America has the largest percentage of the population throughout the world where more U.S. citizens reside.  See, a 2012 proposal I prepared for the State Bar of California, Taxation Section:  Proposed Expansion of Category of Registered Deemed-Compliant FFI: “The Good Faith Local FFI” and the Accidental American along with Liliana Menzie that describes the high concentration of U.S. citizens throughout the region.  “Latin America, as a prime example, has a high concentration of U.S. citizens residing in various countries pursuant to the State Department data, in some cases representing a large percentage of the population (e.g., nearly one half of a percent -0.4%- of the total  population of the Americas consisted of U.S. citizen[s] . . .”