Another one from the New York Times.
I have been telling anyone who will listen that they should file their U.S. tax returns if they are living here in Japan. Now, I notice in the new passport book, there is a reminded on Page 51, Paragraph D, of that obligation for any American outside the country.
Because FEIE covers about $92,000 of earned income as an exclusion, for most expats this means a zero return—just pay the country where you are working. I am astounded that, even with this rule, some Americans here still refuse to file.
The other game that has been going on, of course, is both wealthy people and corporations coming up with ways not to pay U.S. taxes. It’s especially troubling when it’s an American multinational corporation, because it’s like the rest of us giving subsidies to them to do business overseas and take our jobs there.
Sometimes Congress grants these large corporations special rules to get around paying tax. But other times the companies just make rules up through simple cheating.
When the cheating gets elaborate, the IRS has to employ more resources to track the evasion down. So this is apparently what the Obama Administration is doing now—putting more resources and authority in the international units of the IRS to go after big firms and the wealthy who are cheating.
The point I want to add is: if you think the government is going to go after the big fish (which it should) while letting the small fish slide, it’s not likely.
Remember, if the IRS contacts you first about a missing tax return, you may lose the ability to deduct the approximately $92,000 Foreign Earned Income Exclusion. You would only be able to take a credit for your Japanese taxes. Since Japanese taxes are more “progressive” than American ones, this means you won’t have enough Japan credit to offset the bill to Uncle Sam, if you are an average wage earner.
Additionally, if you are not enrolled in the Japanese pension, potentially the Service could come after you for self-employment taxes. Especially, if your work arrangement is not being classified as “employee”.