American expats are being warned that the Internal Revenue Service is expected to become more aggressive in its tactics to make those living and working overseas compliant with their tax obligations.

It is considering new measures to tackle what is estimated at billions of dollars in unreported and untaxed monies being held offshore by US citizens, according to New York based Greenback Expat Tax Services.

These include withholding US Passports from individuals with unpaid taxes and fining foreign banks for FBAR violations required under the bank secrecy act.

‘While neither of these options for enforcement are currently being used by the IRS, they show that the government is only looking to become more and more aggressive in their tactics to make US expats compliant with their tax obligations. We recommend that Americans living abroad ensure that they take action to get compliant with their US expat taxes,’ said David McKeegan.

He points out that taxes should be filed in time for the June 15th deadline, expats should report their foreign bank accounts by June 30th, and, if already delinquent they should take advantage of the current Voluntary Disclosure Programme which expires at the end of August to get back on track.

Although it is not a new requirement for Americans living abroad to file their US expat taxes and report their foreign bank accounts, the past couple of years have seen the government instituting and researching even more stringent measures to ensure compliance. Two new reports suggest that measures are only becoming more aggressive.

One such measure may be a restriction on US passports for delinquent taxpayers. Congress requested a study by the Government Accountability Office (GAO) to look into whether withholding US passports from individuals with outstanding tax balances would increase IRS tax collections. The study, released by the GAO in March 2011, suggests billions in unpaid tax revenue could be claimed by the IRS if individuals owing taxes were denied US passports.

‘As federal deficits continue to mount, the federal government has a vital interest in efficiently and effectively collecting the billions of dollars of taxes owed under current law. Federal law already allows the linkage of debt collection with the passport issuance process in certain areas, including for certain outstanding State Department debt and child support enforcement, the report said.

The study looks at Fiscal 2008 and shows that taxes of at least $5.8 billion dollars were owed by people who were issued US passports. This includes a gambler who owed $46.6 million dollars and a property owner who owes $39.9 million. The GAO concluded that legislation denying US passports to individuals with outstanding tax liabilities “could have the potential to help generate substantial collections of known unpaid federal taxes and increase tax compliance for tens of millions of Americans holding passports’.

FBAR requires all foreign bank accounts to be reported to the Treasury by June 30th, if the cumulative balance is over $10,000 at any point during the year. Foreign banks are currently required to submit account details of US citizens with over $10,000 in their accounts to the IRS or face substantial withholding penalties on their US assets. This has caused a number of foreign financial institutions and Swiss banks to close out the accounts of US citizens.

The Justice Department is now considering whether it could apply the FBAR penalties to Banks and Financial Institutions if these institutions have violated American tax law. ‘This will no doubt make it even more difficult for Americans living abroad to open and maintain legitimate banking relationships where they live and work,’ explained McKeegan.

‘It is now not uncommon for US citizens to be denied bank accounts because foreign banks either do not want to or are unable to comply with US government reporting requirements,’ he added.