The federal government is cracking down on taxpayers who are dual citizens or residents of the United States and another country. These people may have knowingly or unintentionally failed to timely file US federal and/or state income tax returns.
For example, individual U.S. citizens or permanent residents often fail to file if they live outside of the United States for an extended period of time and have not formally expatriated for U.S. immigration and tax law purposes. Their failure to file may be motivated by an attempt to save money, but it’s a mistake that exposes them to civil and criminal penalties. Ironically, their U.S. taxes due may not be substantial, since the taxes due are net after application of the foreign tax credit rules, foreign earned income exclusions, other provisions in the Internal Revenue Code allowing for a reduction of U.S. income tax, and applicable income tax treaties or conventions.
Another example, dual residents, despite taking advantage of a tie-breaker provision in an applicable treaty, may not realize that they are accountable to file FBAR and other ownership disclosure forms. These people may think, in good faith, that they were “non-resident”.
Dual residents or citizens also may fail to timely file Reports of Foreign Banks and Financial Accounts (FBARs) under the FINCEN regulations. The FBAR must be filed by any United States individual by June 30 of the year after the calendar year in which the United States individual (U.S. citizen or U.S. resident, corporation, trust, partnership or limited liability company created, organized or formed under U.S. law) has a financial interest in, or signature authority over, foreign financial accounts (FFAs) (including bank, securities and other types of accounts) where the aggregate value of the FFAs is more than $10,000 at any time during the calendar year. According to federal regulations, “signature authority” means the authority, either alone or in conjunction with another, to control the disposition of money, funds or other assets held in a financial account by direct communication to the person with whom the financial account is maintained. If you sign a signature card, you have “signature authority”.
The federal government is aware there are many people who fail to meet their personal obligations under Title 26 on federal income tax and Title 31 on FBAR reports for several years. The IRS released a fact sheet (FS-2011-13) on December 7, 2011, summarizing federal income tax return and FBAR filing requirements. The fact sheet discusses how to file a federal income tax return or FBAR and warns of potential penalties. Taxpayers who owe no U.S. income tax may not be subject to delinquency penalties for failure to file or pay.
Remember, U.S. citizens, even if also citizens of a foreign country and no matter where they reside, are required to annually file U.S. federal income tax returns reporting their income from U.S. and foreign sources. In addition, many U.S. states will try to assert tax jurisdiction over former residents who have moved abroad.
Stay up to date on federal and state tax laws by consulting with an experienced Massachusetts tax attorney.
