IRS Makes It Dramatically Easier (and less costly) For US Citizens Living In Another Country to Catch up on Past-Due Tax Returns and FBARs

July 5, 2012
By Michael Brooks on July 5, 2012 4:03 PM |

On June 26, 2012, the IRS announced a new initiative to help US citizens living in another country (very likely dual citizens) catch up with their unfiled US tax returns and FBARs.

Background

In our law office in Palm Springs, we regularly see clients who may be Americans by birth, but who live in (and are also probably a citizen of) another country (usually Canada). While the dual American/Canadian may enjoy visiting Indian Wells three months a year, she really lives in Vancouver. But since she was born in Seattle, she has a social security number, she is a US citizen, and (whether she wants one or not) she has an obligation to file a US tax return every year (even though maybe she's never filed one in her life). Plus, since she has bank accounts outside the US in Canada with more than $10,000 in them, she has an annual FBAR filing requirement as well.

Before the Recent Announcement, This Was a Big Problem for the Dual Citizen Living Abroad

Dual citizens living (permanently) in a country other than the US did not know what to do. Was our Seattle-born dual US/Canadian citizen living permanently in Vancouver supposed to file 25 years of back taxes? Wouldn't that lead to possibly thousands of dollars in back taxes and interest and penalties to the IRS? And as for the delinquent FBARs, isn't the failure to file penalty for an FBAR $10,000 per each year going as far back as the FBAR program has been in existence (it started in 2003)? Our Vancouver resident might think it would be nice to get straight with the IRS because she doesn't like the specter of unpaid income tax and past due FBARs hanging over her head, but it's certainly not worth the $300,000 in back taxes and interest and FBAR penalties she will have to pay for coming clean.

IRS New Procedure Offers Significant Relief For Dual Citizens Living in a Foreign Country Who Have Not Filed US Tax Returns or FBARs in Years

Under the new procedure, taxpayers will be required to file delinquent tax returns for the past three years and file delinquent FBARs for the past six years. All submissions will be reviewed, but for those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. How do we know if a taxpayer has a "low risk" case where there may be no penalties imposed? Absent unique factors, if the submitted returns show less than $1,500 in tax due in each of the reviewed years, they will be treated as low risk.

So the Dual Citizen Who Hasn't Done a US Tax Return in 20 Years Can Do the 3 Most Recent Tax Returns, and 6 Most Recent Past Due FBARs, and Maybe Have No Penalties and Now Have a Clean IRS History?

The answer is yes! And it's easier than you might think. If our Vancouver resident, born in Seattle (and with a vacation home in Indian Wells) has been paying proper taxes in Canada all these years, due to the tax cooperation between the US and Canada (and the tax credit system), she very possibly owes $0 in past due US taxes for the reviewed years (easily below the $1,500 per year threshold). And the same goes if she was born in New York City and now lives in France (or almost any other country). No failure to file income tax return penalty, and no $10,000 per year failure to file FBAR penalty!!! This is great news for the dual citizen living abroad who just wants to clean their US tax record.

See IR-2012-64 for more details, or call our office.