Dual Citizenship and FBAR: Do You Need To File?

IRS regulations mandate that all Americans file tax returns, even if they live, work and pay taxes in another country. This can be a significant problem if you have dual citizenship and have not filed a U.S. income tax form.

Many persons with dual citizenship may be unaware they need to file a U.S. tax return, and even fewer may know that they have to file a Foreign Bank Accounting Reporting (FBAR). The IRS understands this and has created another initiative to allow taxpayers to come forward to avoid more severe penalties.

This new initiative, the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI) is available for taxpayers who come forward and complete all requirements on or before September 9, 2011.

The objective of the Offshore Voluntary Disclosure Initiative (2011 OVDI) is the same as the 2009 OVDP - to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.

Voluntary disclosure is a longstanding practice of IRS Criminal Investigation (CI) whereby CI takes timely, accurate and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It allows noncompliant taxpayers to resolve their tax liabilities and lessen their chance of criminal prosecution.

When a taxpayer complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.

What If I Fail To Comply?

If you fail to submit a voluntary disclosure and the IRS find the violation, you are at risk of suffering substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.

The IRS is actively engaged in finding the identities of those with undisclosed foreign accounts. They warn "increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC § 6038D) become effective."

Foreign Bank And Financial Accounts (FBAR)

If you have a foreign bank account, or what the IRS terms, "a financial interest in or signature authority over a foreign financial account," including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account, the Bank Secrecy Act may require that you to report the account on a yearly basis to the IRS by filing a Report of Foreign Bank and Financial Accounts (FBAR).

The FBAR is required because foreign financial institutions are generally not subject to U.S. bank regulations. FBAR is used to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law.

Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation.

Who Must File A FBAR

United States persons are required to file an FBAR if:

  • The U.S. person had a financial interest in or signature authority over at least one financial account located outside of the United States
  • The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported

IRS Penalties

The following is list of items that carry a penalty for compliance failures.

  • A penalty for failing to file the Form TD F 90-22.1
  • A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
  • A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner
  • A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations
  • A penalty for failing to file Form 5472, Information Return of a 25 percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
  • A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation
  • A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
  • Fraud penalties imposed under IRC §§ 6651(f) or 6663
  • A penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
  • A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
  • An accuracy-related penalty on underpayments imposed under IRC § 6662

As you can see, other than fraud (and even that carries a citation reference to a specific code section) you may not intuitively know you are subject to the requirement, and you could easily violate one of these sections and not even realize it.

Criminal Charges

So, what happens beyond fines and financial penalties if you fail to provide the IRS with the required information?

Possible criminal charges related to tax returns include tax evasion, filing a false return and failure to file an income tax return. Willfully failing to file a FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.

A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

Death And Taxes

While death and taxes may be the only two certain things in life, taxes are, as Justice Holmes once said, the price for an ordered society. Taxes are made by humans, and in the U.S., that means Congress and the IRS. But because an "ordered society" is a result, it does not imply that the process of creating the tax regulations is necessarily orderly or intuitive.

For that reason, it may be not be clear if you have to file FBAR related material. However, this much is clear; it there is the slightest chance you may be subject to the requirements (you have dual citizenship, you have foreign bank accounts) it is imperative to consult with an attorney knowledgeable in tax matters. A tax attorney can help you determine what requirements you are subject to and assist you in meeting these requirements.

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