A group speaking for US expats has welcomed extension of a tax filing rule but says more needs to be done to tackle a big hit to taxpayers overseas.

American Citizens Abroad has welcomed moves by the US government to ease the pain of certain tax filing and reporting requirements due to hit expats.

The group said the US Treasury Department “provides some relief from the new transition tax for Americans overseas”. The tax measure had been part of the recently enacted Tax Cuts and Jobs Act. ACA worried that US expats who have a reportable interest in a controlled foreign corporation will be hit. Many expats would not be able to afford it, ACA said. 

Earlier this week, the Treasury and Internal Revenue Service pushed back the previous filing date to June 15 this year from the original April 15 deadline. 

However, ACA said officials haven’t yet given a ruling that would exclude small taxpayers from the scope of the transition tax; it will continue to press for this change.

“The transition tax imposes tax on certain accumulated earnings in a foreign control corporation owned by US shareholders. This tax affects, among others, American individuals residing abroad who own a foreign corporation. This corporation might be labeled something else under local law, but for US tax purposes it might be treated as a corporation, and therefore its owner(s) might be confronted with this new tax. There need not be an actual distribution to the individual(s). The new law creates a deemed or constructive distribution,” ACA said in a statement.  

Charles Bruce, legal counsel at ACA, said: “It is frankly ridiculous for the transition tax to apply to small taxpayers owning small foreign corporations. They should not be put through the same wringer as the largest US multinational corporations, making the same calculations and completing and filing exactly the same form."

The organization reiterated calls for legislators to shift the US towards territorial-based tax and away from the worldwide system. At present, any US citizen, even if they haven’t spent a day of their adult lives in the US, comes under the IRS tax filing net. In 2010, the US enacted the FATCA legislation designed to hunt for expat tax evaders; the rules are blamed for squeezing provision of banking and other financial services to Americans abroad, encouraging increasing numbers to give up their US nationality.

"The transition tax, with its mind-boggling complexity, is just one of the serious problems resulting from the recent Tax Cuts and Jobs Act (TCJA).  In enacting TCJA, Congress overlooked Americans abroad.

The answer to these problems, and several other problems existing before TCJA, is enactment of residency-based taxation. Pure and simple," Marylouise Serrato, executive director, ACA, added.