Tax Return Filing Requirements
Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets
This post is written simply because so many U.S. citizens residing overseas are reasonably confused about the complexity of U.S. tax law. The mere requirement to file U.S. income tax returns for those overseas often comes as a great surprise. My non-U.S. born wife is an exception (as she also lives outside the U.S.) simply because I have repeatedly told her for our 20 some years of marriage. 
Some in the IRS erroneously think U.S. citizens residing overseas do and should understand U.S. tax law. I posed one simple scenario to a very sophisticated IRS attorney not very long ago who specializes in the FATCA rules.
Her view is (hopefully was) that U.S. citizens throughout the world know or should know the U.S. tax laws because the instructions to IRS Form 1040 are clear.
This thought knocked me off my figurative chair onto the floor! Smack.
My surprise is based upon my own experience working with individuals and families throughout the world, in numerous countries. I have noticed a number of notions, based upon these andectodal experiences as follows:
- A minority of U.S. citizens (unless they lived most of their lives in the U.S. and recently moved overseas as an “expatriate”) have no real basic idea of how the U.S. federal tax laws work; let alone to their assets and income in their country of residence. See USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms
- There are indeed plenty of immigrant U.S. residents (certainly less than 50% by my own experience – especially when concepts of PFICs and foreign tax credits start being discussed) who even understand the basics of U.S. international tax law.
- If they reside in an English speaking country that has relatively strong family or historical ties to the U.S. (e.g., England, Ireland, Scotland, and Canada, etc.) they are likely to have a better idea of the U.S. federal tax laws, but still the majority don’t know key concepts. See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
- Even those in English speaking countries that have less historical or family ties to the U.S. have a lesser understanding (e.g., New Zealand, Australia, Kenya, South Africa, India, etc.).
- Those who do not speak English know even less about U.S. tax laws and how they apply to them.
- Many individuals who learn of these requirements overseas are sometimes driven to great despair. The message they receive is not a correct one under the law in my view: as they read IRS materials (for instance, see FAQs 5, 6 and and former 51.2 from the Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014) and come to the conclusion they will soon be going to jail, criminally prosecuted or otherwise be subject to tens of thousands of dollars worth of penalties for their failure to file a range of tax forms.
- Literally, sometimes as a tax lawyer I feel more like a psychologist, when these individuals come to me saying they can’t sleep, they can’t eat, they are seeing a cardiologist for high blood pressure, etc. and even in a most extreme case they thought suicide was a solution. See, How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas.
- Individuals around the world (even tax professionals) and certainly laypeople, are not commonly reading TaxAnalysts (nor would they subscribe) or other tax professional publications that explain many of the intricacies of U.S. tax laws.
- Learning and understanding U.S. tax laws, including just the basics, requires a great deal of time, aptitude for nuances and details, literacy, patience and a level of aptitude for such matters that simply escape many people around the world (most I would say). see, “PFICs” – What is a PFIC – and their Complications for USCs and LPRs Living Outside the U.S. I can relate to this personally, as I am an international tax professional (indeed I even studied a post graduate law course outside the U.S. in a non-English language), have spent my entire professional career of more than 25 years in the area, and yet only generally have a very superficial understanding of tax laws throughout the countries where I am dealing with clients. I don’t try to understand the details of those laws.
- Many people are angry and frustrated (justifiably so, in my view, in many cases) after learning they are subject to these rules. See comment above about being a psychologist. Plus, USCs and LPRs residing outside the U.S. – and IRS Form 8938. In addition, see, Taxpayer Advocate Report on Burdens of Benign Taxpayers who Make Mistakes
Back to the intelligent IRS tax attorney. My question to her was: “Why would you, as a U.S. born individual not be reviewing the tax laws, tax forms and tax instructions of the country where your parents were born prior to immigrating to the U.S.?” I asked: “Are you not reviewing those laws in the original language of your parents (not English, but the other language of your parent’s country) to understand what tax forms and returns you should be filing?”
The IRS attorney’s response was: “What: of course, I am not reviewing such tax forms or filing information or tax laws, as I would have no tax obligations in that foreign country where I have no income, no assets or no bank or financial accounts!”
My follow-up question was a simple one: “Don’t you realize that U.S. federal tax law (Title 26) and financial bank reporting laws (Title 31) do just that!”
“Hmm she paused: how can that be?” I don’t recall if she said this out loud, or just said it with her puzzled expression.
The answer of course is that through citizenship (including derivative citizenship through a U.S. parent even though the child never spent a single day of residence in the U.S., let alone received any income or assets); that same individual in the mirror position as that IRS attorney is subject to a host of U.S. federal tax and financial reporting laws. See, Sir Winston Churchill – Famous People. Did he become a U.S. citizen at birth via “derivative citizenship”? Did he file U.S. income tax returns?
Here is the big disconnect. It’s not just among the ill-informed or those lesser educated on the fine points of law. I had the pleasure this week along with my wife to host two educated, worldly and engaging individuals who have been married some 20 years together. They are well read and highly educated. Both are lawyers by training, one practices law that often pushes him fairly deeply into the tax law and his wife is a wonderful and experienced judge in the California state courts.
I asked them (as I like to ask people around the world) if they had ever heard or understood that the U.S. federal tax law imposes taxation and very detailed reporting on the worldwide income and assets of U.S. citizens who reside outside the U.S. I discussed 
Cook v. Tait and the U.S. Civil War a bit. See both Supreme Court’s Decision in Cook vs. Tait and Notification Requirement of Section 7701(a)(50) and The U.S. Civil War is the Origin of U.S. Citizenship Based Taxation on Worldwide Income for Persons Living Outside the U.S. ***Does it still make sense?
All of it was a great surprise to them! They were in utter shock and both are residents in the U.S., highly educated in the law and are like the vast majority of the world, including U.S. citizens who reside outside the U.S.
This is the common response for many U.S. citizens residing overseas.
12 Year Old (and Older) U.S. Citizens Residing Outside the U.S. Must Have An “In-Person” Interview in a U.S. Embassy or Consulate for SSN Application in 1 of Just 17 Posts Worldwide
As previous posts have mentioned, U.S. citizens (USCs) residing overseas can only comply with U.S. tax law and FATCA certifications if they have a social security number (SSN). See, U.S. Citizens Overseas who Wish to Renounce without a Social Security Number will Necessarily be a “Covered Expatriate”
See key excerpts of the paper titled URGENT NEED FOR U.S. CITIZENS RESIDING OUTSIDE THE U.S. TO BE ABLE TO OBTAIN A TAXPAYER IDENTIFICATION NUMBER (“TIN”) OTHER THAN A SOCIAL SECURITY NUMBER that explains this dilemma:
This dilemma affects numerous USCs throughout the world, which is now compounded by the certification and reporting requirements of USCs and third parties, such as FFIs and NFFEs[2] under the Foreign Account Tax Compliance Act (“FATCA”).
* * *
The regulations provide the specific rule that all USCs must have a SSN[1] as their TIN. There are no general exceptions in the regulations to the requirement that a USC must have a SSN as their TIN.
This regulatory requirement specifically directs the USC to the forms that must be completed and filed with the SSA, in order to obtain a SSN, as follows:[2]
(1) Social security number. Any individual required to furnish a social security number pursuant to paragraph (b) of this section shall apply for one, if he has not done so previously, on Form SS-5, which may be obtained from any Social Security Administration or Internal Revenue Service office. He shall make such application far enough in advance of the first required use of such number to permit issuance of the number in time for compliance with such requirement. The form, together with any supplementary statement, shall be prepared and filed in accordance with the form, instructions, and regulations applicable thereto, and shall set forth fully and clearly the data therein called for. Individuals who are ineligible for or do not wish to participate in the benefits of the social security program shall nevertheless obtain a social security number if they are required to furnish such a number pursuant to paragraph (b) of this section. [emphasis added]
These Title 26 regulations discuss individuals requesting forms from “any Social Security Administration or Internal Revenue Service office” which clearly implies that the SSA and the IRS have offices overseas.
Unfortunately, this is not the case, as the IRS recently announced it is closing its full-time walk-in offices in London, Frankfurt and Paris, as the office in Beijing, China was closed in 2014.[3] Similarly, the SSA has no overseas offices, but does have limited field office operations in Canada, the British Virgin Islands and Samoa.[4]
Therefore, it is clear that the above regulations are speaking to individuals who reside and live in the U.S., and not USCs residing overseas when it requires USCs to “ . . . make such application far enough in advance of the first required use of such number to permit issuance of the number in time for compliance with such requirement. [5]
These Title 26 regulations require the application be made well in advance of any tax filing requirements are not realistic for USCs residing overseas as is explained herein. This author has seen the issuance of SSNs take more than 6 months, even when the USC could have an interview in their country of residence.
More importantly, there are very few countries (only 17) where in-person interviews can even be held. See, discussion below.
USCs who have lived most, if not all of their lives outside the U.S., commonly do not have a SSN. The procedural requirements imposed by the SSA to obtain a SSN in these cases are complicated and unrealistic for USCs living overseas.[6] This author has seen cases where USCs residing overseas have even spent the money and resources and time to travel to the U.S. to apply for a SSN, yet were turned away by the SSA, due to various procedural requirements which were not satisfied.
Often times obtaining a SSN overseas is nearly impossible, depending upon which country and where within that country the USC resides.
A. Obtaining a SSN Outside the US by a USC – Much More than Just Filing SSA Form SS-5
The SSA does not have offices outside the U.S. although they have a so-called “Office of International Operations.”[7] The focus of OIO is the administration of social security benefits, not obtaining SSNs for USCs residing overseas. Since the SSA is assisted by the U.S. Department of State (who are not SSN experts), USCs have to rely upon various U.S. embassies and consulate offices around the world, as they try to obtain a SSN.
B. Tax Return Filing Requirements – Minimum Gross Income
Any USC individual is obligated under the U.S. federal tax law to file a federal income tax return IRS Form 1040 if they meet minimum thresholds of income. For the tax year 2015, the thresholds are low, and are reached once the gross income is at least the sum of (i) the “exemption” amount (currently $4,000) and (ii) the “standard deduction” amount (currently $6,300 for single and married filing jointly and $12,600 for married couples filing jointly).[8]
This is true, even if all of the income is earned income and eligible for the foreign earned income exclusion, which is $100,800 for the tax year 2015. [9]
Additionally, USCs living overseas necessarily have a U.S. tax return filing requirement, when they meet these low thresholds of gross income. In these cases, tax returns that are not filed by the 15th of June are not considered timely filed.[10]
II. The Social Security Administration Rules Make it Nearly Impossible for Many USCs Overseas to Reasonably Obtain a SSN
The policy and procedures of the SSA regarding issuing SSNs have changed significantly over the years.[11] The Social Security Administration (SSA) provides a detailed chronology of the major changes in policy and procedures regarding filing for and obtaining a SSN.[12] One of the most significant revisions in the last decade came from The Intelligence Reform and Terrorism Prevention Act of 2004 (P.L. 108-458), which imposes various standards for the verification of documents or records submitted by an individual.
A. Only a Few Countries Around the World have Personnel at U.S. Embassies or Consulate Offices that Can Process SSN Applications – SSA Form SS-5-FS
Applying for SSNs overseas is severely restricted compared to an application in the U.S.
According to the U.S. Department of State, Foreign Affairs Manual (“FAM”), only certain “Claims-Taking Posts” in specific countries “may” include “processing applications for Social Security Numbers.” [13]
These 17 countries (and a city in the case of Jerusalem) with Claims-Taking Posts include:
“Austria, Argentina, Costa Rica, Dominican Republic, France, Germany, Greece, Ireland, Italy, Japan, Jerusalem, Mexico, Norway, Philippines, Poland, Portugal, Spain, and the United Kingdom.”
Noticeably absent are many Western European countries, virtually all of Latin America, virtually all of Asia, virtually all of Eastern Europe, all of the Middle East (except Jerusalem), all of the African continent, all of the Australian continent and surrounding island countries and Russia, among many other significant countries, including OECD member countries.[14]
Nothing in the FAM requires any of these “Claims-Taking Posts” to actually process applications for a SSN. Plus, there are of course hundreds of other countries throughout the world, not listed above, which do not have such a U.S. Department of State Post. For these reasons, USCs in countries such as China must travel to a U.S. Department of State Post (e.g., the Philippines) which is able to process applications for SSNs.
B. In Person Interview Required for Individuals Older than 11 Years Old
Individuals who are older than 11 years old must personally go to the U.S. Embassy or Consulate with a Claims-Taking Post. See 7 FAM 530, pages 7, 12, 13 and 7 FAM EXHIBIT 530(D) Mandatory In-Person Interview Worksheet SSN Applicant Age 12 or Older – Original SSN * * *
All of these rules makes you wonder whether foreign born individuals, such as actress Kim Cattrall from Sex & the City fame would have ever obtained a social security number overseas while she lived in Canada or the UK.
[1] See, Treas. Reg. § 301.6109-1(a)(1)(ii)(A).
[2] See, Treas. Reg. § 301.6109-1(d)(1).
[3] See, Bloomberg article, 14 January 2015 by Kocieniewski, IRS Will Shut Last Overseas Taxpayer-Assistance Centers: “After budget reductions over the last four consecutive years, the IRS is forced to make tough choices during this period of fiscal austerity and these closures have relatively little impact on taxpayers and treaty partners,” said Julianne Breitbeil, an IRS spokeswoman. Also, see IRS website that still reflects the London and Paris offices as open http://www.irs.gov/uac/Contact-My-Local-Office-Internationally.
[4] See, SSA website, Service Around the World, http://www.ssa.gov/foreign/
[5] See, Treas. Reg. § 301.6109-1(d)(1).
[6] See discussion below, regarding requirements to obtain a SSN. I.II, I.I,The Social Security Administration Rules Make it Nearly Impossible for Many USCs Overseas to Reasonably Obtain a SSN
[7] See SSA website, “Office of International Operations” – http://www.ssa.gov/foreign/ “Service Around the World – Welcome to SSA’s Office of International Operations (OIO) home page. The purpose of this site is to assist Social Security customers who are outside the U.S. or planning to leave the U.S. OIO is responsible for administering the Social Security program outside the U.S. and for the implementation of the benefit provisions of international agreements. Since SSA has no offices outside the U.S., OIO is assisted by the Department of State’s embassies and consulates throughout the world.”
[8] See, IR-2014-104, Oct. 30, 2014 and IRS Publication 501.
[9] See, IRC § 911 and IRS Publication 54.
[10] See, Treas. Reg. § 1.6081-5.
[11] See, SSA website, The Story of the Social Security Number, by Carolyn Puckett, Social Security Bulletin, Vol. 69 NO. 2, 2009 (http://ssa.gov/policy/docs/ssb/v69n2/v69n2p55.html.
[12] See, SSA website, Significant Milestones in Social Security Number Policy. A detailed chronology of the major changes in policy and procedures. http://www.ssa.gov/history/ssn/ssnchron.html.
[13] See 7 FAM 530, page 2 of 64.
[14] In contrast to these 17 countries (and one city – Jerusalem) where a USC residing overseas must travel to apply for a SSN, the Treasury Department has announced it has around 100 countries that have signed, or “have reached agreements in substance” a FATCA IGA. USCs throughout the world are required by the Foreign Account Tax Compliance Act (“FACTA”) to provide their U.S. TIN to financial institutions throughout the world (on IRS Form W-9, or its equivalent), which under current law necessarily must be a SSN. Of course, if they have no SSN, they cannot sign IRS Form W-9 which provides in Part II: “Under penalties of perjury, I certify that: 1. The number shown on this form is my correct taxpayer identification number . . .”
[15] See, 7 FAM 534.3 e.