Ecuador is quickly becoming a major destination for American expatriates. This surge in popularity is, chiefly, being driven by hardworking individuals who are looking for a safe, beautiful and affordable location for their retirement. For many Americans, the cost of living in Ecuador – at least outside of the major cities of Quito and Guayaquil – is extremely reasonable and even allows for budgeting for return trips to the States. For countries with modern services and infrastructure, Ecuador represents one of the most affordable destinations in the Western hemisphere.
There are a number of additional benefits for expats who retire to Ecuador. US Social Security benefits are not taxed. Property taxes are extremely low in the country. The cost of healthcare also comes in at roughly 10 to 20 percent of comparable services in the US. Seniors who are aged 65 or older also receive discounts on their utilities and entertainment and receive other special privileges. Finally, the country uses the US dollar as its defacto currency.
However leaving the US behind and relocating to Ecuador will not relieve US citizens, green card holders, and others US taxpayers of their duty to report and pay taxes. Failure to account for these tax obligations can result in severe civil and criminal consequences.
Americans are taxed on their worldwide income
The United States is one of two nations in the world that tax on the basis of one’s worldwide income rather than on the basis of where the income was earned. The other nation that taxes in this fashion is Eritrea. What this means for those with a connection to the United States is that they must report their worldwide income to the IRS and pay tax on the basis of this income. While this can lead to “double-taxation”, the failure to file or pay US taxes can be punished by civil or criminal penalties.
US Expats must make FBAR and FATCA disclosures
Americans and US taxpayers, whether they are living at home or abroad, must also disclose the existence of foreign assets and financial accounts. Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Banks Accounts (FBAR) are the two main disclosures that must be made. While there is some overlap between the two, each forms its own unique and independent reporting requirement.
The FBAR reporting requirement stems from provisions of the Bank Secrecy Act (BSA). The act requires US taxpayers to disclose the existence of foreign financial accounts via FinCEN Form 114 if the foreign account balance or balances exceeds $10,000. The surplus over the reporting thresholds may only be momentary, but any level of assets beyond $10,000, regardless of duration, will trigger the reporting requirement.
FATCA covers a broader array of assets and account types, but the reporting threshold is higher under this law. In general, the FATCA reporting obligation is not incurred until the account balance exceeds $50,000. However there are instances where the threshold can be even greater. Accounts that must be disclosed under FATCA include:
- Custodial financial accounts
- Deposit accounts
- Foreign stock, securities and mutual funds
- A foreign partnership interest
- Foreign life insurance policy
Failure to provide required disclosures under FBAR or FATCA can result in serious civil and criminal tax consequences.
FBAR and FATCA penalties can often be mitigated by OVDP
Failures to disclose under FBAR of FATCA can lead to serious civil fines or criminal penalties. Under FATCA a penalty of $10,000 for each violation can be imposed un to a maximum of $60,000. A non-willful FBAR violation can, likewise, result in a fine of $10,000 per a year where the account went undisclosed. However, a willful FBAR violation can quickly eclipse the value of the original account. A willful FBAR violation can be punished by a $100,000 fine or 50% of the original account balance, whichever is greater.
Don’t Put Off Your Foreign Tax Issues – Contact Tax Lawyer Robert Hoffman
However tax problems created by your foreign income, assets or accounts can often be corrected by utilizing the Offshore Voluntary Disclosure Program. Under terms of the program a noncompliant taxpayer voluntary discloses their past tax issues in exchange for paying a reduced penalty rate. Furthermore, in a properly handled voluntary disclosure, the IRS is also likely to refrain from criminal prosecution.
Working with an experienced tax attorney can help you resolve your difficult tax problems created by offshore income or accounts. To schedule a free consultation, call the Hoffman Law Offices at 800-897-3915 or contact us online today.