The National Taxpayer Advocate 2023 Annual Report to Congress highlights how Taxpayers abroad are underserved and continue to face challenges in meeting their U.S. tax obligations. As a result, the National Taxpayer Advocate has prioritized compliance challenges for taxpayers abroad in its FY 2025 Objectives Report to Congress. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. Each year, the National Taxpayer Advocate presents an Annual Report to Congress, identifying at least 10 of the most serious problems facing taxpayers.

Why do Taxpayers abroad face challenges in meeting their U.S. Tax obligations?

The 2023 Annual Report to Congress states that Taxpayers abroad have an “added layer of complexity of applying the laws and treaties unique to the country in which they reside. Taxpayers lack accessible, real-time customer service assistance from the IRS. Taxpayers abroad may face severe penalties if they fail to file forms, some of which they may not even be aware. The complexity of the tax code, the inability to easily comply, and the fear of severe penalties are so great that some taxpayers choose to relinquish their U.S. citizenship.”

Help from private tax professionals that have experience with taxpayers abroad is paramount and far reaching given that the IRS compliance efforts are geared towards having the IRS compliance teams better detect tax cheating, identify emerging compliance threats, improve case selection tools, and reduce the tax gap.

Foreign source income must be reported

A U.S. citizen or resident alien’s (those with a green card or who meet the substantial presence test) worldwide income is subject to U.S. income tax, regardless of their residence. “They’re also subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States. U.S. citizens and resident aliens must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty. They must also report earned income, such as wages and tips, from sources outside the United States.”

An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are available only if an eligible taxpayer files a U.S. income tax return.

Complexity of filing tax and international information returns is due to overlapping reporting requirements

The 2023 Annual Report to Congress states that the “reason for the complexity with IIRs (International Information Returns) is the overlapping statutory reporting requirements under FATCA and Bank Secrecy Act. FATCA requires U.S. citizens, residents, and certain nonresidents to report information on foreign financial assets to the IRS when the assets’ value exceeds certain thresholds. The Bank Secrecy Act requires U.S. citizens and residents to report foreign accounts to FinCEN when their combined value exceeds $10,000 at any time during the year. Individuals must complete separate forms for each law: they file Form 8938, Statement of Specified Foreign Financial Assets, with their annual income tax return to comply with FATCA and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to comply with the Bank Secrecy Act. Individuals are subject to significant penalties for failure to report assets on one or both forms, even when they owe little or no tax.”

Taxpayers abroad need help

U.S. Tax Consultants with intensive experience in Spain and Portugal can assist taxpayers with compliance with International Information Returns, keeping up with international tax laws, advise on tax credits and deductions and navigate complex tax issues.

If you are an expat in Spain or Portugal, please do not hesitate to contact US Tax Consultants to be following your tax obligations, minimizing you tax liability and using tax experts in the tax obligation of both countries Portugal/Spain and the U.S.