Ina statement on its website apparently posted on Wednesday, the IRS acknowledged that “some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or FBARS, despite being required to do so”.
Noting that “Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law”, it went on to add: “Note that penalties will not be imposed in all cases.”
David Treitel, tax director at London-based US Tax & Financial Services, which specialises in looking after American expatriates, said the statement was “potentially extremely significant”, particularly its seeming acknowledgement that it would be wrong to levy charges against taxpayers if they had a “reasonable cause” for not having sent in all their forms on time.
“It is excellent news,” Treitel added.
However, he warned that “as with so much of the tax law, reasonable cause is a complicated concept, which can only be decided based on the specific facts in each case”.
What is more, Treitel said, extreme care would be needed when drafting the letters to accompany late FBARs which explained why penalties should not be charged, since “getting just a few words wrong could truly lead to huge penalties, in some cases even running into the millions of dollars”.
The executive director of American Citizens Abroad (ACA), a Geneva-based organisation which represents expatriates, was more cautious.
"We have seen the new IRS guidance and are reviewing it," Marylouise Serrato said.
"At first glance it would appear that there continues to be lots of ‘discretion’ on the part of the examiners in determining cases. This could continue to cause problems in particular with FATCA [Foreign Account Tax Compliance Act] coming, where the penalties are even more onerous than FBAR.
"The IRS should do more to be clear on the difference between willful and non-willful, and criminal tax evaders and filers making common errors.
"Also, the IRS has said nothing about those who entered [into the recent US tax amnesty scheme known as the offshore voluntary disclosure initiative] thinking they were ‘doing the right thing’ to correct past errors. Many who ended up paying huge fines were expecting a statement on this, but that doesn’t seem to have been communicated."
Response to media coverage
The IRS clarification is thought to have been rushed out in response to some recent press coverage concerning the way cases of Canadian dual citizens who have failed to file tax returns and/or FBARs are being handled by the IRS.
As reported, one of these articles was a Globe and Mail interview of the US ambassador to Canada, who told the newspaper that new rules covering how American expats and dual citizens living in Canada would be treated would be announced within weeks.
The story was picked up by other publications around the world. Meantime, a Toronto Sun story posted on Wednesday quoted Canadian finance minister Jim Flaherty, a recent critic of the hard-line approach America has recently begun to adopt towards expatriates who have failed to file tax returns and FBARs, as saying that US treasury officials were “working on a proposal that would make it less onerous for Canadian banks to comply” with FATCA.
FATCA will bring in a raft of new reporting requirements beginning in 2014, and is being lobbied against by many foreign financial institutions and other groups because the costs of compliance are expected to be high.
“They’re trying to work on a more reasonable result for the Canadian banking system. We’re not a tax haven in Canada and the American provisions are really designed to get at people hiding money in tax havens,” the Sun story quoted Flaherty as saying.
In addition to the recent press coverage, such organisations as ACA, which has received large numbers of complaints from American expatriates about the way FBAR rules in particular have suddenly begun to be enforced, have also sought to bring pressure to bear on US authorities to be more understanding of people who genuinely did not know they had outstanding tax or filing obligations.
Summary of information
The latest IRS clarification, which is headed “Information for US Citizens or Dual Citizens Residing Outside the US”, is described as having been designed to “summarise information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties”.
It warns that the topics it addresses may not apply to a particular taxpayer’s situation” and that the IRS “continues to consider the topics discussed in this fact sheet, and will provide additional information as it becomes available”.
Other points contained in the IRS fact sheet:
• Taxpayers who owe no US tax (eg, due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties. In addition, no FBAR penalty will apply in the case of a violation that the IRS determines was due to reasonable cause.
• As a United States citizen, you must file a federal income tax return for any tax year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction. For information about whether you must file a federal income tax return for a particular tax year, including exemption amounts and standard deductions, see Publication 501 (Exemptions, Standard Deduction, and Filing Information) for that year.
• Generally, you are required to report your worldwide income on your federal income tax return. This means that you should report all income, regardless of which country is the source of the income.
• Generally, taxpayers need only to file returns going back six years.
• Those who are required to file a federal tax return and fail to do so, or who fail to pay the amount of tax owed, may be subject to a penalty unless they show the failure “is due to reasonable cause and not due to willful neglect”.
The penalty is 5% of the amount of tax required to be shown on the return. If the failure continues for more than one month, an additional 5% penalty may be imposed for each month or fraction thereof, during which the failure continues. The total failure to file penalty cannot exceed 25%. If no tax is due, however, “there is no penalty”.
