IRS Update on FBAR for US Citizens, Dual Citizens or Residents Living Outside the US

The IRS has issued new guidance on how penalties are determined when a US citizen, dual citizen or permanent resident lives outside the US and has not filed tax returns or reported foreign bank accounts (FBAR).  In many cases penalties would be waived altogether.

In many cases, the US citizen has complied with the tax requirements in their country of residence.  But US filings have not been made for years.

Often in these cases no US tax is owed because of the Foreign Earned Income Exclusion or the Foreign Tax Credit. In addition, there's usually no tax penalty either as the penalty is based on the amount of the tax which is "zero".,,id=250788,00.html

The problem has been late FBAR reports.  

If imposed, penalties for late or unfiled FBARs can be huge, starting at $10,000 per year and going up.   It is widely reported that penalties have  not been  imposed against the average taxpayer, but that left the  taxpayer wondering whether he would be the unlucky one that happened to be penalized.  Taxpayers were also afraid to comply going forward for fear that they would suddenly be on the IRS radar screen for prior filings.  There was a reasonable cause exception for FBAR penalties however this depended on the person being fully compliant with US tax filings which most living overseas were not.

Another alternative was participation in one of the two limited amnesty programs in 2009 and 2011 (OVDI).  But there were two issues here: First, penalties would still be levied starting at 5% of the highest bank balance.  Second, legal fees were in many cases as high or higher than the penalties.

As a result many people decided to do nothing even after they became aware of their filing obligation.   The problem with the "head in the sand" approach going forward is that the IRS is going to start getting information directly from foreign banks.   This has already started to some degree but is supposed to become widespread beginning in 2014.  So continuing not to file and hoping not to get caught also is not a good option.

Now finally there's some relief.  
With the Dec 2011 announcement (shown above), the IRS is on the record stating that taxpayers can catch up on late tax and FBAR penalties without penalties for reasonable cause.  This is different from before in that "reasonable cause" was really not an option for late FBARs if there were also late tax filings.  

This provides many people a chance to get caught up without facing huge penalties.  

Taxpayers should also be aware that there is a new form to complete as part of their 2011 tax returns.  
  • FATCA requires foreign financial assets be reported starting in 2011.  
  • This is in addition to the FBAR filing requirement and follows somewhat different rules.

Please contact me for more information.