IRS Offers Some Relief for Expats and Dual Citizens

The Internal Revenue Service has provided information to clarify the tax responsibilities of U.S. citizens and dual citizens living abroad in response to concerns from Canadians and expatriates from other countries about penalties that might be levied on their unpaid taxes and undeclared bank accounts.

The IRS posted the information on its Web site Friday after meetings between the U.S. Ambassador to Canada and Canadian officials to address worries from Americans living abroad that they would be subject to heavy penalties they had never been aware of until recently (see IRS to Ease Tax Penalties for Americans Living in Canada).

The Foreign Account Tax Compliance Act, or FATCA, which was included as part of the HIRE Act last year, requires foreign financial institutions to report directly to the IRS information about the financial accounts held by U.S taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Taxpayers who don’t report the information on foreign bank account reporting forms could be subject to heavy penalties. Expatriate groups such as American Citizens Abroad have expressed concerns about being penalized for having retained their U.S. citizenship.

The IRS tried to allay such fears in its new page, entitled “Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.,” but still insisted that some of the requirements for reporting are necessary.

“The IRS is aware that some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so,” it said. “Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law. This fact sheet summarizes information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties. Note that penalties will not be imposed in all cases.”

However, the IRS is still under obligation to levy certain penalties for noncompliance since it cannot flout congressional legislation. The FATCA provisions were included in the HIRE Act of 2010 as a way to help offset the cost of tax credits for hiring new employees by cracking down on unpaid taxes that the IRS has been aggressively pursuing in countries like Switzerland.

In its new information page, the IRS noted, “If you are required to file a federal income tax return and fail to do so, or you fail to pay the amount of tax shown on your federal income tax return, you may be subject to a penalty under Internal Revenue Code (IRC) section 6651, unless you show that the failure is due to reasonable cause and not due to willful neglect.  The penalty is 5 percent of the amount of tax required to be shown on the return.  If the failure continues for more than one month, an additional 5 percent penalty may be imposed for each month or fraction thereof during which the failure continues.  The total failure to file penalty cannot exceed 25 percent.  Note that there is no penalty if no tax is due.”

As for FBAR penalties, the IRS left open the possibility of not imposing penalties if a taxpayer could show reasonable cause.

“If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty,” said the agency. “Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation.  See 31 U.S.C. Section 5321(a)(5).  Note that this penalty is applicable only in cases in which there is willful intent to avoid filing.  Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation.  There is no penalty in the case of a violation that IRS determines was due to reasonable cause.”