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IRS Alert For U.S. Citizens And Dual Citizens Residing Outside The U.S.

Background

The U.S. Internal Revenue Service (IRS) understands that some U.S. citizens – including some who are also citizens of another country – residing outside the U.S. have failed to file federal U.S. income tax returns as well as Foreign Bank Account Reports (FBARs) to report their foreign financial holdings. While these individuals may be complying with tax filings and payments in their foreign countries of residence, they are not filing returns in the U.S. In certain cases they are unaware of their U.S. filing obligations and in other cases they have been misadvised on the matter.

In order to facilitate U.S. tax compliance for those individuals, on December 13, 2011 the IRS issued updated guidance in the form of Fact Sheet FS 2011-13.

Key Elements of the Guidance

The aims of the IRS are: 

  • To clarify the issues facing U.S. citizens described above who wish to commence complying with U.S. law regarding their income tax returns and FBARs; and 
  • To offer a no-penalty opportunity for such compliance by those individuals.

 Observation: In essence, the Guidance provides that U.S. citizens or dual citizens residing abroad with (1) “no balance due” income tax returns – due, for example, to foreign tax credits or the U.S. foreign earned income exclusion – or (2) “balance due” income tax returns but where the failure to file was due to reasonable cause, will not be assessed late filing or late payment penalties. In addition, there will be no penalties assessed on those same individuals with respect to late FBAR filings, if the failure to comply was due to reasonable cause.

The Guidance includes two examples: one where the income tax return results in no balance due and the other where a balance is due, with an explanation of reasonable cause for failure to file resulting in no penalty for late filing of income tax return, late payment of income, or late filing of FBAR.

Reasonable Cause

In general, in order to establish reasonable cause for failure to file, the taxpayer must show that the failure was not due to negligence and that “ordinary business care and prudence in meeting tax obligations” were exercised. The IRS will evaluate the facts and circumstances of each case and, depending on the taxpayer’s situation, a lack of knowledge of U.S. filing obligations may constitute reasonable cause.

New Reporting Requirements for Tax Year 2011

It should be noted by taxpayers covered by this guidance that, beginning with 2011, individuals with greater than $50,000 in foreign financial assets will need to include IRS Form 8938 with their individual tax returns. We have previously reported on this and other provisions of the Foreign Account Tax Compliance Act beginning with our Alert of November 2010.

However, individuals who have no requirement to file a U.S. income tax return will have no obligation to file Form 8938, even if they hold foreign financial assets exceeding $50,000.

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