Dual US (and Foreign Country) Citizens Who Don't Owe Tax in The US, It's Easy to Get Compliant with IRS Now. For the Other US Citizens With Foreign Accounts and Who do Owe US Tax, You Need to Consider the 2012 FBAR Amnesty Program

July 23, 2012
By Sanger & Manes, LLP on July 23, 2012 5:09 PM |

IR-2012-65 allows Dual Citizens who Don't Owe Tax in the US a Pain-Free Way to Become Compliant

First of all, which dual citizens don't owe tax in the US? As a general matter, a dual citizen who have been living in a foreign country and been paying that country's tax (as appropriate) probably does not owe much tax in the US (if any). The US taxes its citizen's income no matter where they earn it anywhere in the world. But the US also works in cooperation with almost every country in the world (except for countries such as Cuba, Iran and Yemen...i.e., countries we have no relations with). If you are an American citizen living in France (you might also be a French citizen), and you have been paying your appropriate French tax for the money you earn in France, odds are you will not owe tax in the US. Why is this so? Most foreign countries have higher tax rates than the US. So as long as the income is of a type which we recognize (such as wages for services, or gains for stock sales, or rental income, or dividends, etc), the US will credit income earned in France by the dual French/US citizen. Thus, after the credit, the US citizen probably owes $0 US tax or very little US tax, on the amounts he earns in France. And the same goes for that US citizens with most every other country.

Now let's not confuse the issue of whether the dual citizen owes any US tax with the obligation of the dual citizen to: (a) file US tax returns; and (b) file FBARs annually if they have bank accounts outside the US with over $10,000 at any point in the calendar year. Those obligations generally exist whether the person owes US tax or not. But for those people the new guidance is terrific. Those individuals must complet their past-due tax returns (at least 3 years) and delinquent FBARs (at least 6 years), and they'll probably have no penalty to get compliant provided you don't owe significant US Tax. A great deal.

Now if you haven't been paying the appropriate tax in France (or whatever foreign country), and you probably haven't been paying the appropriate tax in the US if you haven't been completing your tax returns here, then (provided you have bank accounts in the foreign country over $10,000) you need to go through the 2012 FBAR amnesty program (review our prior posts for a description of the OVDP).

Let's point out some important factors of the new amnesty program.

More Notes about the 2012 FBAR Amnesty Program

The 2012 FBAR amnesty program is currently underway. There is no deadline for the program. The program could be pulled by the IRS at any time, or the IRS could raise the current amnesty FBAR penalty (27.5% of the highest (aggregate) overseas balance in the highest year with a bank account abroad) at any time. Again, for those going through the amnesty program, you really have strongly consider taking the 27.5% penalty if you did not check the box on the Schedule B of the Form 1040 (asking the taxpayer to check the box if he or she had any foreign bank accounts). For those who don't go into the amnesty and eventually get caught, the penalties can be enormous. They can wipe you out, no question. Also, in really egregious circumstances, jail is a possibility. And, as we understand it, foreign countries (like Switzerland) are feeling little option but to turn over bank account records to the US government (either presently, or soon).

The IRS clearly draws a distinction between those taxpayers who come in voluntarily, and those who are caught. If you are a US citizen or resident and have overseas bank accounts and you owe tax in the US on those amounts (maybe because you haven't paid the appropriate tax in the foreign country at issue), you probably should consider the 2012 amnesty program soon.