Nowhere to Hide
There are millions of United States citizens who live and work outside the US. These non-resident citizens are still subject to IRS reporting requirements, i.e., they must still file tax returns and the Report of Foreign Bank and Financial Accounts (the “FBAR”), and they are subject to payment of taxes on all income, including income earned abroad. The US, virtually alone among nations, imposes an extra-territorial tax regime, meaning that US citizens, even if they live and work overseas, must pay taxes on income earned offshore. The American expat may be entitled to credits for living abroad, and may be able to deduct taxes paid to a foreign government. Living and working abroad do not mitigate one’s US tax obligations.
An American expat might surmise that living abroad, he or she is far removed from the IRS. The expat may be tempted to hide foreign income, and not disclose an account in a foreign country, thinking that the the IRS would never learn about income in a foreign country, and a local account at a non-US bank. However, that would be a serious risk. How might the IRS learn about a foreign account, so far away and seemingly off the American radar?
First, via the Qualified Intermediary (QI) Program, in effect since 2001. Under the Qualified Intermediary Program, foreign banks are obligated to share information with the IRS. Moreover, under IRS Announcement 2008-98, the foreign banks must now actively investigate and report to the IRS whether US persons (or entities controlled by US persons) are the owners of the account. Many thousands of foreign banks are enrolled in the QI program. Not fulfilling their QI obligations would result in a lack of access to correspondent banks in the US, effectively severing such banks from international financial transactions. The IRS also routinely audits random foreign accounts at QI banks. And QI banks must also submit to external auditors, who might also discover and report non-compliant accounts.
Second, via “John Doe” summons issued by the US Department of Justice, approved by a US court and then served upon a foreign bank, requesting information about US account holders. In 2002, courts approved John Doe summonses issued against credit card service companies, and the IRS learned the identities of US persons accessing unreported foreign funds via credit and debit cards. In 2009, a federal court in Miami approved a John Doe summons against UBS, seeking account records of US persons with supposedly “secret” Swiss bank accounts. In settling the litigation that ensued, UBS agreed to turn over 10,000 names of Americans with accounts at UBS. Aside from the erosion of Swiss banking secrecy, which itself is a monumental development, equally significant is that John Doe summonses work, and will be used against other banks and financial service providers, in other foreign countries.
Third, via the “Hague Convention on the Service Abroad of Judicial and Extra Judicial Documents in Civil and Commercial Matters”, pursuant to which a summons, inquiry, demand for information or documents, from the IRS to an American expat, can be delivered and served upon that expat in the country where he resides. It has recently been reported that the IRS has used the Hague Convention in issuing administrative subpoenas upon wealthy Americans in Britain and Switzerland.
Fourth, via Tax Information Exchange (TIE) Agreements, which obligate the foreign country to assist in both criminal and civil tax investigations. Most countries have already signed a TIE with the US, including tax havens such as Liechtenstein and Switzerland. Countries which have not yet signed a TIE are anticipating being asked by the US to sign one. Not signing one would, as noted above, ostracize the defiant country from the international banking system.
Fifth, via a Mutual Legal Assistance Treaty (MLAT), which requires each participating country to disclose information – including bank account data – to the U.S. government in connection with an investigation of a serious crime, including tax fraud. Treaty loopholes, such as what constitutes “tax fraud” under the laws of the foreign treaty country, have been effectively closed by the successful U.S. attack on UBS and Swiss banking secrecy. The MLATs specify that local secrecy laws may not form a basis for refusing to provide the requested information.
Sixth, if the account is at a bank within the European Union, or a bank outside the EU that routes via Europe, then the account might already be under the watch of the CIA pursuant to the “Brussels Agreement”, also known as the “Swift Agreement”. That agreement gives the CIA direct access, upon demand, to bank accounts held in the EU. While perhaps this sounds very “Big Brother” and akin to conspiracy theory, such monitoring does exist and was developed after the terrorist attacks on 9/11. The purpose of the Agreement is to investigate terrorism finance, yet there is no limitation to the extent of banking information to be shared, including with the IRS.
Finally, even assuming that none of the above are actual threats to a non-compliant expat account (an assumption that would indeed be a huge leap of faith), the account is vulnerable to discovery if the expat ever wishes to access or use the foreign funds in any way connected to the US. Should the expat wish to move back to the US, accessing the account would raise red flags. If the expat wishes to buy real property in the US, or even invest in US securities, the source of funds would be revealed. A wire transfer from the foreign account to a US bank would likely trigger a Suspicious Activities Report (SAR) from the recipient bank to the IRS.
It should be pointed out that none of these threats to a foreign account is directed specifically against American expats living abroad. Indeed, the same threats apply to US residents with non-compliant foreign bank accounts. It’s not the location of the taxpayer which gives rise to the threat; it’s the foreign account itself. Thus, whether the account holder is an American living and working overseas, or an American living in the US with an account offshore, both persons should be concerned about the likelihood of the IRS discovering the account and prosecuting the account holder for not disclosing the account and paying taxes on foreign income.
Given these numerous threats to offshore account secrecy, what should the expat (or indeed, the US resident) do to remedy a non-compliant foreign account? First, the account holder should bring the account into compliance. This includes the proper disclosure, i.e., “checking the box” as to ownership of a foreign account on IRS form 1040, Schedule B, as well as annual submission of the FBAR form mentioned above (Treasury Department Form TD F 90-22.1). It also means, of course, reporting and paying tax on all foreign income, including earnings, as well as interest and gains in or to the foreign account. However, it must be noted that simply, and suddenly, declaring a foreign account might give rise to the question of whether the account existed in prior years, in which case one would be alerting the IRS to past non-compliance. Thus, one must also address the question of whether or not to make a voluntary disclosure to the IRS. A voluntary disclosure would lead to paying past taxes, significant penalties and interest, but would likely avoid prosecution for criminal tax fraud, and would make amends for past non-compliance and allow for future compliance. The account holder might also consider a legal strategy involving transfer of the undeclared account in return for a foreign annuity and establishment of an offshore trust, which would accomplish asset protection, tax benefits and future tax compliance, but would not rectify past non-compliance and thus the voluntary disclosure option should again be considered.
Foreign banking tax compliance is crucial irrespective of where one lives, within the US or overseas. Non-compliant foreign bank accounts should be brought into compliance. The possibilities of discovery of the account, as seen above, are many. Expat Americans living and working abroad are as much on the radar as Americans living and working and banking at home.
Your Payments While You Are Outside The United States 
(En Español) Contacting Social SecurityThe Social Security Administration website is a valuable resource for information about all of Social Security’s programs. There are a number of things you can do online. In addition to using the Social Security Administration website, you can call toll-free at 1-800-772-1213. The Social Security Administration can answer specific questions from 7 a.m. to 7 p.m., Monday through Friday. Social Security Administration can provide information by automated phone service 24 hours a day. (You can use their automated response system to give them a new address or request a replacement Medicare card.) If you are deaf or hard of hearing, you may call their TTY number, 1-800-325-0778. The Social Security Administration treats all calls confidentially. The Social Security Administration also wants to make sure you receive accurate and courteous service. That is whyy have a second Social Security representative monitor some telephone calls. If you are outside the United States, see the list of offices where you can get more information. This publication is also printed in French, German, Greek, Italian and Spanish. | |||||||||||||||||||||
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Introduction | This booklet explains how being outside the U.S. may affect your Social Security payments. It also tells you what you need to report to us so we can make sure you receive all the Social Security payments you are entitled to. For more information, see Things that must be reported and How to report. | ||||||||||||||||||||
When you are “outside the U.S.”? | When we say you are outside the U.S., we mean that you are not in one of the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands or American Samoa. Once you have been out of the U.S. for at least 30 days in a row, you are considered to be outside the country until you return and stay in the U.S. for at least 30 days in a row. If you are not a U.S. citizen, you also may have to prove that you were lawfully present in the U.S. for that 30-day period. For more information, contact the nearest U.S. Embassy or consulate or Social Security office. | ||||||||||||||||||||
What happens to your right to Social Security payments when you are outside the U.S.? | If you are a U.S. citizen, you may receive your Social Security payments outside the U.S. as long as you are eligible for them. However, there are certain countries to which we are not allowed to send payments. If you are a citizen of one of the countries listed below, Social Security payments will keep coming no matter how long you stay outside the U.S., as long as you are eligible for the payments.
If you are a citizen of one of the countries listed below, you also may receive your payments as long as you are outside the U.S., unless you are receiving your payments as a dependent or survivor. In that case, there are additional requirements you have to meet.
If you are not a U.S. citizen or a citizen of one of the other countries listed above, your payments will stop after you have been outside the U.S. for six full calendar months unless you meet one of the following exceptions:
(This list of countries is subject to change from time to time. For the latest information, please visit www.socialsecurity.gov/international/countrylist4.htmnearest U.S. Social Security office, U.S. Embassy or consulate.) or contact your If you are not a citizen of one of the countries listed above, you cannot use this exception. If you are not a U.S. citizen and none of these exceptions applies to you, your payments will stop after you have been outside the U.S. for six full months. Once this happens, your payments cannot be started again until you come back and stay in the U.S. for a whole calendar month. You have to be in the U.S. on the first minute of the first day of a month and stay through the last minute of the last day of that month. In addition, you may be required to prove that you have been lawfully present in the U.S. for the full calendar month. For more information, contact the nearest U.S. Embassy or consulate or Social Security office. | ||||||||||||||||||||
Additional residency requirements for dependents and survivors | If you receive benefits as a dependent or survivor of the worker, special requirements may affect your right to receive Social Security payments while you are outside the U.S. If you are not a U.S. citizen, you must have lived in the U.S. for at least five years. During that five years, the family relationship on which benefits are based must have existed. Children may meet this residency requirement on their own or may be considered to meet the residency requirement if it is met by the worker and other parent (if any). However, children adopted outside the U.S. will not be paid outside the U.S., even if the residency requirement is met. The residency requirement will not apply to you if you meet any of the following conditions:
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Countries to which we cannot send payments | U.S. Treasury RegulationsU.S. Treasury Department regulations prohibit sending payments to you if you are in Cuba or North Korea. If you are a U.S. citizen and are in Cuba or North Korea, you can receive all of your payments that were withheld once you leave that country and go to another country where we can send payments. Generally, if you are not a U.S. citizen, you cannot receive any payments for months in which you live in one of these countries, even though you leave that country and satisfy all other requirements. Social Security restrictionsSocial Security restrictions prohibit sending payments to individuals in Cambodia, Vietnam or areas that were in the former Soviet Union (other than Armenia, Estonia, Latvia, Lithuania and Russia). Generally, you cannot receive payments while you are in one of these countries, and we cannot send your payments to anyone for you. However, exceptions can be made for certain eligible beneficiaries in countries other than Cuba or North Korea. To qualify for an exception, you must agree to the conditions of payment. One of the conditions is that you must appear in person at the U.S. Embassy each month to receive your benefits. Contact your nearest U. S. Social Security office or U.S. Embassy or consulate for additional information about these conditions and whether you might qualify for an exception. If you do not qualify for payment under this procedure and you move from one of these countries to another country where we can send payments, you can receive all the benefits for which you were eligible except when you were in one of the countries listed in the section Social Security restrictions . | ||||||||||||||||||||
What you need to do to protect your right to benefits | If you are living outside the U.S., periodically we will send you a questionnaire. This lets us figure out if you still are eligible for benefits. Return the questionnaire to the office that sent it as soon as possible; if you do not, your payments will stop. In addition to responding to the questionnaire, notify us promptly about changes that could affect your payments. If you fail to report something or deliberately make a false statement, you could be penalized by a fine or imprisonment. You also may lose some of your payments if you do not report changes promptly. | ||||||||||||||||||||
Things that must be reported | Listed below are things that must be reported. An explanation of each is is provided when you click on the subject.
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How to report | You can report by contacting us in person, by mail or by telephone. If you live in the British Virgin Islands, Canada or Samoa, you can send your report to the nearest U.S. Social Security office. If you live in Mexico, you can send your report to the nearest U.S. Social Security office, Embassy or consulate. If you live in the Philippines, you can send your report to:
In all other countries, you can report to the nearest U.S. Embassy or consulate. Visit www.socialsecurity.gov/foreign for a complete list of these offices. If you find it easiest to contact us by mail, send your report by airmail to the following address:
When you contact us, include all of the following information:
Change Of AddressTell us if your address changes so your checks will not be lost or delayed. Even if your payments are being sent to a bank, report any change in your home address. When you write to the U.S. Embassy or consulate or the Social Security Administration about a change of address, please type or print your new address carefully and be sure to include the country and ZIP or postal code. Also, be sure to list the names of all your family members who will be moving to the new address. [Back to "Things That Must Be Reported"] Work Outside The U.S.If you work or own a business outside the U.S. and are younger than full retirement age, notify the nearest U.S. Embassy or consulate or Social Security office right away. If you do not, it could result in a penalty that could cause the loss of benefits. This loss of benefits is in addition to benefits that may be withheld under one of the work tests explained on the following pages. For people born in 1937 or earlier, full retirement age is 65. Beginning with people born in 1938, full retirement age increases gradually until it reaches age 67 for those born in 1960 or later. Report your work even if the job is part-time or you are self-employed. Some examples of the types of work which should be reported are work as an apprentice, farmer, sales representative, tutor, writer, etc. If you own a business, notify us even if you do not work in the business or receive any income from it. If a child beneficiary (regardless of age) begins an apprenticeship, notify the nearest U.S. Embassy or consulate or the Social Security Administration. An apprenticeship may be considered work under the Social Security program. The following work tests may affect the amount of your monthly benefit payment. Work after full retirement age does not affect the payment of benefits. Benefits are withheld for each month a beneficiary younger than full retirement age works more than 45 hours outside the U.S. in employment or self-employment not subject to U.S. Social Security taxes. It does not matter how much was earned or how many hours were worked each day. A person is considered to be working on any day he or she:
Generally, if a retired worker’s benefits are withheld because of his or her work, no benefits can be paid to anyone else receiving benefits on his or her record for those months. However, the work of others receiving benefits on the worker’s record affects only their own benefits. The annual retirement test Under certain conditions, work performed outside the U.S. by U.S. citizens or residents is covered by the U.S. Social Security program. If your work is covered by U.S. Social Security, the same annual retirement test that applies to people in the U.S. applies to you. NOTE: Work by some U.S. citizens and residents outside the U.S. is exempt from U.S. Social Security as a result of international Social Security agreements the U.S. has concluded with the following countries:
If you are working in one of these countries and your earnings are exempt from U.S. Social Security taxes because of the agreement, your benefits will be subject to the foreign work test. For further information on how your benefits may be affected by an agreement, contact the nearest U.S. Embassy or consulate or Social Security office. If your work is covered by the U.S. Social Security program, you can receive all benefits due you for the year if your earnings do not exceed the annual exempt amount. This limit changes each year. If you want to know the current limit, ask at any U.S. Embassy or consulate or Social Security office or write to us at the address shown under “How to report.” If your earnings go over the limit, some or all of your benefits will be reduced by your earnings.
Count your earnings for the whole year in figuring the benefits due you. For most people, this means earnings from January through December. People who reach full retirement age can receive all of their benefits with no limit on their earnings. The year your benefits start The year you reach age 18 [Back to "Things That Must Be Reported"] If you return to work or your disability improvesIf you receive payments because you are disabled, let us know right away if your condition improves or you go back to work. You can keep receiving payments for up to nine months while you are working. This nine-month period is called a “trial work period.” The trial work period gives you a chance to test whether you are able to work without worrying about having your payments stopped. If, after nine months, you are able to continue working, you will get payments for three more months before they stop. If you are not able to keep working, you will continue to receive disability benefits. [Back to "Things That Must Be Reported"] MarriageLet us know if anyone receiving benefits gets married. In some cases, Social Security payments stop after marriage. In other cases, the amount of the payments changes. This depends on the kind of benefits received and, sometimes, on whether the person you marry gets payments. [Back to "Things That Must Be Reported"] Divorce or annulmentNotify us if your marriage is annulled or you get a divorce. Divorce or annulment does not necessarily mean that your Social Security payments will stop. If you are receiving payments based on your own work record, divorce or annulment of your marriage will not affect your payments. Also, if you are a spouse age 62 or older and you were married to the worker for 10 years or more, your payments will continue even if you divorce. Contact us if your name has changed so that we can show your new name on your payments. [Back to "Things That Must Be Reported"] Adoption of a childWhen a child is adopted, let us know the child’s new name, the date of the adoption decree and the adopting parent’s name and address. [Back to "Things That Must Be Reported"] Child leaves the care of a wife, husband, widow or widowerIf you are a wife, husband, widow or widower receiving benefits because you are caring for a child who is under age 16 or who was disabled before age 22, notify us right away if the child leaves your care. If you do not, it could result in a penalty which would cause an additional loss of benefits. A temporary separation may not affect your benefits as long as you still have parental control over the child. Tell us if there is any change in where you or the child lives, or if you no longer have responsibility for the child. If the child returns to your care, you should tell us that also. [Back to "Things That Must Be Reported"] Child nearing age 18 is a full-time student or is disabledPayments to a child will stop when the child reaches age 18 unless he or she is unmarried and either disabled or a full-time student at an elementary or secondary school. If a child age 18 or over is receiving payments as a student, notify us immediately if the student:
If a child whose payments were stopped at age 18 becomes disabled before age 22 or is unmarried and enters elementary or secondary school on a full-time basis before age 19, notify us so we can resume sending payments to the child. Also, a disabled child who recovers from a disability can have payments started again if he or she becomes disabled again within seven years. [Back to "Things That Must Be Reported"] DeathIf a person who receives Social Security benefits dies, a benefit is not payable for the month of death. For example, if a beneficiary died any time in June, the payment dated July 3 (which is payment for June) should be returned to the sender. [Back to "Things That Must Be Reported"] Inability to manage fundsSome people who receive Social Security payments cannot manage their own funds. The person who takes care of the beneficiary should let us know. We can arrange to send the payments to a relative or other person who can act on behalf of the beneficiary. We call this person a “representative payee.” [Back to "Things That Must Be Reported"] Deportation or removal from the U.S.If you are deported or removed from the U.S. for certain reasons, your Social Security benefits are stopped and cannot be started again unless you are lawfully admitted to the U.S. for permanent residence. Even if you are deported or removed, your dependents can receive benefits if they are U.S. citizens; or, if not U.S. citizens, they can still receive benefits if they stay in the U.S. for the entire month. But they cannot receive benefits for any month if they spend any part of it outside the U.S. [Back to "Things That Must Be Reported"] Changes in parental circumstancesPayments to a child who is not a U.S. citizen could stop or start when certain changes occur. Let us know when the child’s natural, adoptive or stepparent dies, marries or gets a divorce (or annulment), even if that person does not receive Social Security payments. [Back to "Things That Must Be Reported"] Eligibility for a pension from work not covered by Social SecurityYour U.S. Social Security benefit may be smaller if you become entitled to a U.S. Social Security retirement or disability benefit and start to receive another monthly pension, such as a foreign social security or private pension, based in whole or in part on work not covered by U.S. Social Security. A different formula may be used tofigure your U.S. Social Security benefit. For more information, ask at any U.S. Embassy or consulate or Social Security office for Windfall Elimination Provision (Publication No. 05-10045). | ||||||||||||||||||||
If your check is lost or stolen | It usually takes longer to deliver checks outside the U.S. Delivery time varies from country to country and your check may not arrive the same day each month. If you do not receive your check after a reasonable waiting period, or if it is lost or stolen, contact the nearest U.S. Embassy or consulate or write directly to the Social Security Administration. Our address:
We will replace your check as soon as possible. But please make every effort to keep your check safe, because it will take some time to replace a check while you are outside the country. | ||||||||||||||||||||
Direct deposit in financial institutions | You may want your Social Security payment to be directly deposited into your account at either a financial institution in the country where you live or a U.S. financial institution. Even if you use the direct deposit service, you must keep us informed of any change in your current residence address. Direct deposit has several advantages. You never have to worry about your check being delayed in the mail, lost or stolen. With direct deposit you receive your payment much faster than if you are paid by check (usually one to three weeks faster than check deliveries). You also avoid check cashing and currency conversion fees. Some countries where direct deposit payments are available include:
To determine if direct deposit or other forms of electronic payment are available in the country where you live—or to sign up for direct deposit—contact the nearest U.S. Embassy or consulate or U.S. Social Security office, or write to the Social Security Administration, P.O. Box 17769, Baltimore, Maryland 21235-7769, USA. | ||||||||||||||||||||
Taxes | If you are a U.S. citizen or U.S. resident, up to 85 percent of the Social Security benefits you receive may be subject to the federal income tax. If you file a federal income tax return as an “individual” and your combined income is $25,000 to $34,000, you may have to pay taxes on up to 50 percent of your Social Security benefits. “Combined income” means your adjusted gross income plus nontaxable interest plus one-half of your Social Security benefits. If your combined income is over $34,000, you may have to pay taxes on up to 85 percent of your Social Security benefits. If you file a joint tax return, you may have to pay taxes on up to 50 percent of your Social Security benefits if you and your spouse have a combined income of $32,000 to $44,000. If your combined income is over $44,000, you may have to pay taxes on up to 85 percent of your Social Security benefits. If you are a member of a couple and file a separate return, you probably will pay taxes on your benefits. If you are not a U.S. citizen or a U.S. resident, federal income taxes will be withheld from your benefits. The tax is 30 percent of 85 percent of your benefit amount. It will be withheld from the benefits of all nonresident aliens, except those who reside in countries which have tax treaties with the U.S. that do not permit taxing of U.S. Social Security benefits (or provide for a lower tax rate). The U.S. has such treaties with Canada, Egypt, Germany, Ireland, Israel, Italy, Japan, Romania, Switzerland and the United Kingdom (defined as England, Scotland, Wales and Northern Ireland). Under the tax treaty with Switzerland, benefits paid to residents of Switzerland who are not U.S. citizens, are taxed at a rate of 15 percent. In addition, the Social Security benefits paid to individuals who are citizens and residents of India are exempt from this tax to the extent that their benefits are based on federal, state or local government employment. (This list of countries may change from time to time.) After the end of the year, you will receive a statement showing the amount of benefits you were paid during the year. Many foreign governments do tax U.S. Social Security benefits. U.S. residents planning to live in another country should contact that country’s embassy in Washington, D.C., for information. Social Security benefits are calculated in U.S. dollars. The benefits are not increased or decreased because of changes in international exchange rates. | ||||||||||||||||||||
What you need to know about Medicare | Medicare is a health insurance program for eligible people who are age 65 or older or disabled. Medicare protection consists of two basic parts: hospital insurance and medical insurance. The hospital insurance part of Medicare pays hospital bills and certain follow-up care after you leave the hospital. Medical insurance helps pay doctor bills and other medical services. Medicare generally does not cover health services you get outside the U.S. The hospital insurance part of Medicare is available to you if you return to the U.S. No monthly premium is withheld from your benefit payment for this protection. If you want the medical insurance part of Medicare, you must enroll and there is a monthly premium that normally will be withheld from your payment. Since Medicare benefits are available only in the U.S., it may not be to your advantage to sign up and pay the premium for medical insurance if you will be out of the U.S. for a long period of time. But you should be aware that your premium, when you do sign up, will be 10 percent higher for each 12-month period you could have been enrolled but were not. If you already are covered by medical insurance and wish to cancel it, notify us. Medical insurance—and premiums—will continue for one more month after the month you notify us that you wish to cancel it. | ||||||||||||||||||||
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