Every year, the IRS publishes an Annual Report. This report functions as a report card of sorts, dutifully noting its accomplishments and challenges.
In 2022, the IRS collected over $4.9 trillion in gross revenue to fund much of the federal government. These funds go to supporting federal infrastructures, including our national parks, air traffic control, and space exploration.
But with over 90,000 employees, an organization the size of the IRS doesn’t operate like a well-oiled machine. It has squeaks, hiccups, and worn-out parts that need replacing. Moreover, there are carry-over impacts from the COVID-19 pandemic still affecting the IRS and legacy issues that persist.
Without further ado, let’s get into the takeaways from this report that are most relevant to Americans living abroad.
IRS has a backlog of unprocessed returns
Most of these unprocessed returns were paper filed. However, millions of e-filed individual returns were not processed immediately, either. For taxpayers, this backlog created high levels of frustration in 2022.
The IRS failed to pay timely refunds to millions of taxpayers for the third year in a row. Because of paper processing delays, it delayed refunds for these taxpayers generally by six months or longer.
The backlog caused millions of automatically generated notices (known within the industry as “IRS nasty grams”) to be sent to taxpayers in error; the information the IRS was asking for was often buried in the unprocessed mail pile.
Filing paper returns has long been the IRS’s kryptonite
Although e-filing options abound these days, certain processes must still be undertaken via paper filing. Prominent among these is the Streamlined Filing Compliance Procedures (SLP), one of the filing procedures Bright!Tax specializes in due to the high volume of need expressed by Americans living abroad to catch up with previously missed tax return filings.
Learn more about the Streamlined Filing Compliance Procedures
While the Streamlined Compliance Procedures is an excellent way for American expats to become and remain tax compliant, the gratification of being all caught up can sometimes be delayed due to the IRS’ dogmatically bureaucratic problems. The forms associated with the SLP are not permitted to be e-filed; they must be submitted on paper. Along with slower refunds, the CPAs at Bright!Tax are seeing six months or more wait times for streamlined process returns to be processed.
The IRS is understaffed
If it feels like you have to channel a lot of patience and energy into reaching an IRS agent when you call their taxpayer helpline, you’re not alone.
No matter the time of day, in 2022, only about 28% of callers could speak with an agent on the phone. While this is an improvement from 2021’s level of service, it falls dramatically short of the IRS’s goal of 85%.
On the service side of things, tax professionals fared no better. Bright!Tax team members often incurred over two-hour wait times before speaking with an agent on behalf of their clients.
Don’t have time to sit on the phone all afternoon waiting to be connected to an IRS agent? Connect with a Bright!Tax CPA today to discuss the particulars of your tax project, and we’ll take it from there.
Unfortunately, it does not look like the situation will improve in the near future. The IRS Taxpayer Advocate, the independent group within the IRS that seeks to protect taxpayers’ rights, expects the IRS to lose 50,000 employees through attrition in the next six years.
This means getting answers to questions, guidance on tax law changes, and help responding to (and often, correcting) “nasty grams” will remain challenging.
IRS uses outdated technology
The user experience of using the IRS website leaves a lot to be desired, to be frank. The interface is cumbersome to navigate and their digital communication tools are minimal. This forces a surplus of taxpayers to contact the IRS by phone, perpetuating the problem of clogged phone lines.
Pro tip: Expats should also be aware of 1099-K for the 2023 filing season.
But the IRS’s technology lacks digital communication capabilities. There is no option to live chat with an agent or email, even though the National Taxpayer Advocate Service estimates over 80% of taxpayers support the implementation of such a feature. What’s more, connecting with an IRS agent is often just the first hurdle of many.
Agents are often unable to provide callers with complete and concrete answers to very specific questions, such as the real reason behind a notice or an “amount due” letter. Sometimes, agents will refer the caller to another department that does not have direct phone access, or put the caller on hold while attempting to transfer the call to a different department.
The experience of contacting the IRS can be very frustrating, particularly for an expat caller. The IRS’s ongoing challenge to provide sufficient service jeopardizes tax compliance, frustrates taxpayers, and impacts their right to quality service.
Expats in particular face challenges filing US taxes from abroad
There isn’t much that folks agree on across-the-board these days, but there is one thing: Expats face serious burdens when attempting to file their taxes from abroad, and the federal resources available to assist are paltry. The IRS has just eleven full-service Volunteer Income Tax Assistance (VITA) sites overseas, all on US military bases. Additionally, as the name implies, the amount of help available at these sites is contingent on the time of the volunteers.
Fortunately, there has been some relief as of late. The IRS has taken some steps to help service international taxpayers by allowing them to gain online access to their taxpayer account online.
Being able to access one’s US taxpayer account online is vital for Americans living abroad in order to access transcripts, retrieve an IP PIN, get updates on Stimulus payments, have easy access to Direct Pay, and set up installment agreements with the IRS, among other things.
Working alongside the Taxpayer Advocacy Panel, a Federal Advisory Committee established on behalf of American taxpayers, Bright!Tax was able to come up with a guide offering tips for expats to successfully access their online IRS records, using the “video call with an agent” option. More broadly, our Bright!Tax Client Services Team is here to assist our clients should they require a hand in setting up their online account.
Increasing international US tax compliance requirements
In spite of the increased complexities when filing US taxes from abroad, US citizens and permanent residents can only expect scrutiny over their filing (or lack of filing) to increase in the coming years.
Expats are required to report and pay applicable taxes on worldwide income to the IRS, including income from offshore accounts and other assets. While taxpayers can hold offshore accounts for several legitimate reasons, some taxpayers have used such accounts to hide income and evade taxes.
A key piece of legislation went into effect in 2010. This legislation, the Foreign Account Tax Compliance Act (FATCA), was intended to reduce tax evasion by requiring greater transparency from foreign financial institutions on the financial holdings of their American clients. This, in theory, would lead to increased tax compliance, and make it easier for tax evaders to be held accountable. Unfortunately, a byproduct of this logical-seeming approach to mitigating tax evasion is that it increased the burden of tax compliance on expats without increasing expat tax filing support.
Save for later: The Top 8 Things You Need To Know About FATCA
To file just their annual 1040, an individual taxpayer can expect to spend 13 hours preparing and filing the information. That’s one and a half work days, or, put another way, an entire season of The Walking Dead. And that doesn’t take into account the hours of research that go into learning about and filing additional forms that may need to be filed.
While we’re talking about forms and FATCA, we can’t leave out the FBAR
The Foreign Bank Account Report (FBAR) is a filing requirement that was introduced through the Bank Secrecy Act (BSA) of 1970. In a similar vein to FATCA, it was created in the spirit of identifying and deterring money laundering. The requirement is simple in principle: Americans living abroad with $10,000 or more in foreign-registered financial accounts at any point during the calendar year must file an FBAR. This rule applies even if the $10,000 is distributed between multiple accounts. Fortunately, this form is only accepted via online filing. Unfortunately, with the increased availability of online banking options to facilitate cross-border money transfers, complex questions often arise.
Need to learn how to file your FBAR in 2023? We’ve got you covered.
Let Bright!Tax help you avoid increased scrutiny by the IRS by filing your return correctly
Tax compliance for US expats is burdensome and enforcement is highly imperfectly administered by the IRS. What’s more, Americans living abroad trying to file even a relatively simple return often find the US tax code to be Complex – with a capital “C.”
Our Bright!Tax CPAs completely empathize and understand – many of us live abroad too! We understand that international tax filing is something that requires time, patience, and a commitment to ongoing learning. Of course, a nose for numbers and a degree (or two!) in accounting don’t hurt either!
If you’ve missed filing tax returns for a year or two, are concerned about complying with FATCA, or simply want to ensure that your expat tax return is filing to your utmost advantage, we would love to speak with you. Get started today by contacting our expert team – no tax situation is too complex! Furthermore, it truly is our passion as an organization to help expats like you become and remain tax compliant.