Dual-citizen Americans who live, work or have bank accounts in a foreign country have unique tax concerns. Especially important are tax regulations pertaining to income earned abroad and to bank accounts housed in foreign countries.
The rules can be confusing, and many taxpayers have unwittingly failed to comply. Others chose not to report income because they believed it could not be discovered by the IRS. Now, the IRS is cracking down on foreign tax violations and the penalties for non-compliance can be very severe.
Taxpayers who are concerned they have not complied with foreign income and bank account tax rules should discuss their situation with a tax attorney as soon as possible.
Regulations on Foreign Income
All U.S. citizens are required to file tax returns for income earned abroad, regardless of whether that income was taxed by a foreign government. Taxpayers face penalties of up to 25 percent of the tax owed for failure to file and another 25 percent for failure to pay.
However, according to recent IRS guidance, taxpayers will not be penalized if they can show reasonable cause for not filing. The IRS's determination of whether reasonable cause exists is different for every taxpayer, but will largely hinge on factors including:
- The taxpayer's stated reason for non-compliance
- Whether the taxpayer encountered circumstances beyond his or her control
- The taxpayer's previous compliance history
- The taxpayer's education and experience with foreign income requirements
- The complexity of the taxpayer's compliance issue
Ignorance of the law may be deemed reasonable cause, so long as the taxpayer can show that he or she made reasonable efforts to comply or could not have reasonably been expected to know of the requirement.
Regulations on Foreign Bank Accounts
All Americans must file a Report of Foreign Bank and Financial Accounts - commonly known as an "FBAR" - for foreign bank accounts with an aggregate value of $10,000 or more.
Non-willful failures to file a required FBAR can result in a penalty of up to $10,000 per violation. The maximum penalty for each willful violation is the greater of $100,000 or 50 percent of the unreported accounts' value. If the failure to report rises to the level of tax fraud or evasion, criminal penalties may also apply.
As with foreign income requirements, non-compliance with FBAR regulations may not be penalized if reasonable cause can be shown.
Taxpayers with foreign income or bank accounts would be wise to review the IRS guidance sheet on foreign tax issues for more information.
Of course, this fact sheet is not a substitute for qualified legal advice. Anyone who is worried that they may have run afoul of reporting rules should contact an experienced tax attorney right away.Print this Page