Thursday, December 15, 2011

IRS Issues Guidance on Tax Returns and FBARs Filings by Dual Citizens Residing Outside the U.S.

On December 7, 2011, the IRS issued guidance (FS-2011-13) for dual citizens of the United States and a foreign country who have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs). FS-2011-13is available at http://www.irs.gov/newsroom/article/0,,id=250788,00.html.

FS-2011-13 notes that penalties for dual citizens who fail to file their U.S. tax returns or FBARs will not be automatically imposed. As discussed in more detail in FS-2011-13, such taxpayers will not owe U.S. tax penalties if there is no U.S. tax owed (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) or if the failure was due to reasonable cause.


Reasonable Cause for Failure to File Tax Returns

Whether a failure to file is due to reasonable cause is based on a consideration of facts and circumstances. Reasonable cause relief is generally granted by the IRS if the taxpayer exercised ordinary business care and prudence in meeting the tax obligations but nevertheless failed to meet them. According to the guidance, reasonable cause may be established if the taxpayer shows that the taxpayer was not aware of specific obligations to file returns or pay taxes, depending on all facts and circumstances such as education, history of being subject to federal income tax or penalties, recent changes in the tax forms or law that the taxpayer could not reasonably be expected to know, and the level of complexity of a tax or compliance issue. The guidance also notes that a taxpayer may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or the taxpayer was unaware of the requirement and could not reasonably be expected to know of the requirement.

Reasonable Cause for Failure to File FBARs

The guidance notes that factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. Factors that might weigh against a finding of reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.

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