FS-2011-13, December 2011
The IRS is aware 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 Reports of Foreign Bank and Financial Accounts
(FBARs), despite being required to do so. Some of those taxpayers are now aware
of their filing obligations and seek to come into compliance with the law. This
fact sheet summarizes information about federal income tax return and FBAR
filing requirements, how to file a federal income tax return or FBAR, and
potential penalties.
Note that penalties will not be imposed in all cases. As discussed in more
detail below, taxpayers who owe no U.S. tax (e.g., 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 applies in the
case of a violation that the IRS determines was due to reasonable cause.
This fact sheet is provided for information purposes only, and the topics
discussed may or may not apply to a particular taxpayer’s situation. The IRS
continues to consider the topics discussed in this fact sheet and will provide
additional information as it becomes available.
1. U.S. income tax return filing requirement
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, you only
need to file returns going back six years.
2. Penalties imposed for failure to file income tax returns or to
pay tax
If you are required to file a federal income tax return and fail to do so, or
you fail to pay the amount of tax shown on your federal income tax return, you
may be subject to a penalty under Internal Revenue Code (IRC) section 6651,
unless you show that the failure is due to reasonable cause and not due to
willful neglect. The penalty is 5 percent of the amount of tax required to be
shown on the return. If the failure continues for more than one month, an
additional 5 percent penalty may be imposed for each month or fraction thereof
during which the failure continues. The total failure to file penalty cannot
exceed 25 percent. Note that there is no penalty if no tax is due.
If you
fail to pay the amount of tax shown on your federal income tax return, you may
be subject to a penalty for failing to pay under IRC section 6651(a)(2), unless
you show that the failure is due to reasonable cause and not due to willful
neglect. The penalty begins running on the due date of the return (determined
without regard to any extension of time for filing the return) and is 1/2
percent of the amount of tax shown on the return. If the failure continues for
more than one month, an additional 1/2 percent penalty may be imposed for each
additional month or fraction thereof that the amount remains unpaid. The total
failure to pay penalty cannot exceed 25 percent. Note that there is no penalty
if no tax is due.
Under IRC section 6651(c)(1), the failure to file penalty is reduced by the
amount of the failure to pay penalty for any month in which both apply.
For more information regarding the failure to file penalty and the failure to
pay penalty, see IRS
Notice 746 (Information About Your Notice, Penalty and Interest).
Example 1: Taxpayer is a United States citizen who lived abroad in Country A
for all of 2010, during which time Taxpayer worked as an English instructor. He
maintained a checking account with a bank in Country A, and the highest balance
in the account did not exceed $10,000 in 2010. Taxpayer complied with Country
A’s tax laws and properly reported all his income on Country A tax returns.
Although Taxpayer earned income in excess of the applicable exemption amount and
standard deduction, he did not timely file a federal income tax return for tax
year 2010. After learning of his U.S. filing obligations, Taxpayer filed an
accurate, though late, federal income tax return showing no tax liability after
taking into account the section 911 foreign earned income exclusion and the
foreign tax credit for taxes paid to Country A. Taxpayer is not liable for a
failure to file penalty, since the amount of tax required to be shown on the
federal income tax return is zero. Similarly, Taxpayer is not liable for a
failure to pay penalty, since the amount of tax shown on the return is zero.
Whether a failure to file or failure to pay is due to reasonable cause is
based on a consideration of the facts and circumstances. Reasonable cause
relief is generally granted by the IRS when you demonstrate that you exercised
ordinary business care and prudence in meeting your tax obligations but
nevertheless failed to meet them. In determining whether you exercised ordinary
business care and prudence, the IRS will consider all available information,
including:
- The reasons given for not meeting your tax obligations;
- Your compliance history;
- The length of time between your failure to meet your tax obligations and
your subsequent compliance; and
- Circumstances beyond your control.
Reasonable cause may be established if you show that you were not aware of
specific obligations to file returns or pay taxes, depending on the facts and
circumstances. Among the facts and circumstances that will be considered
are:
- Your education;
- Whether you have previously been subject to the tax;
- Whether you have been penalized before;
- Whether there were recent changes in the tax forms or law that you could not
reasonably be expected to know; and
- The level of complexity of a tax or compliance issue.
You 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 you
were unaware of the requirement and could not reasonably be expected to know of
the requirement.
Example 2: Same facts as Example 1, except Taxpayer’s
federal income tax return showed a tax liability of $2,100. Taxpayer is subject
to the failure to file penalty, unless Taxpayer shows that the failure to file
was due to reasonable cause and not due to willful neglect. Taxpayer is also
subject to the failure to pay penalty, unless Taxpayer shows that the failure to
pay was due to reasonable cause and not due to willful neglect. Since the
failure to file penalty is reduced by the failure to pay penalty for any month
during which both apply, the maximum failure to file penalty is $472.50 (22.5
percent of $2,100). The failure to pay penalty will accrue for 50 months before
the 25 percent maximum is reached. The maximum failure to pay penalty is $525
(25 percent of $2,100). The penalties could be lower depending on when Taxpayer
filed the return and paid the tax shown on the return. The penalties also could
be lower, or there could be no penalties at all, to the extent Taxpayer is able
to show that the failure to file or failure to pay was due to reasonable cause
and not due to willful neglect.
3. Possible additional penalties that may apply in particular
cases
In addition to the failure to file and failure to pay penalties, in some
situations, you could be subject to other civil penalties, including the
accuracy-related penalty, fraud penalty, and certain information reporting
penalties. For information regarding the accuracy-related penalty and the fraud
penalty, see IRS Notice 746 (Information About Your Notice, Penalty and
Interest). For information regarding information reporting penalties, see the
instructions for the specific information reporting form. For example, see the
Instructions for Form 3520-A for information on the penalty for failure to file
Form 3520-A.
4. FBAR filing requirement
As a United States citizen, you may be required to report your interest in
certain foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank
and Financial Accounts (FBAR). For information about FBAR reporting
requirements, including reporting exceptions, see Form
TD F 90-22.1 and the IRS FBAR
Frequently Asked Questions.
5. How to file an FBAR
For information about how and where to file an FBAR, see Form
TD F 90-22.1 and the IRS FBAR
Frequently Asked Questions.
If you learn you were required to file FBARs for earlier years, you should
file the delinquent FBARs and attach a statement explaining why they are filed
late. You do not need to file FBARs that were due more than six years ago,
since the statute of limitations for assessing FBAR penalties is six years from
the due date of the FBAR. As discussed below, no penalty will be asserted if
IRS determines that the late filings were due to reasonable cause. Keep copies,
for your record, of what you send.
6. Possible penalties for failure to file FBAR
If you fail to file an FBAR, in the absence of reasonable cause, you may be
subject to either a willful or non-willful civil penalty. Generally, the civil
penalty for willfully failing to file an FBAR can be up to the greater of
$100,000 or 50 percent of the total balance of the foreign account at the time
of the violation. See 31 U.S.C. § 5321(a)(5). Note that this penalty is
applicable only in cases in which there is willful intent to avoid filing.
Non-willful violations that the IRS determines are not due to reasonable cause
are subject to a penalty of up to $10,000 per violation. There is no penalty in
the case of a violation that IRS determines was due to reasonable cause. For
more information about the FBAR penalty, see Form
TD F 90-22.1. For information about the reasonable cause exception to the
FBAR penalty, see IRM 4.26.16,
Report of Foreign Bank and Financial Accounts (FBAR).
Example 3: Same facts as Example 1, except that the highest balance in
Taxpayer’s checking account exceeded $10,000 and, after reading recent press and
thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though
late, FBAR. The FBAR was accompanied by a written statement explaining why
Taxpayer believed the failure to file the FBAR was due to reasonable cause. The
IRS will determine whether the violation was due to reasonable cause based on
all the facts and circumstances. Taxpayer’s explanation for why he failed to
timely file an FBAR appears reasonable in view of the facts and circumstances of
the case. Since the IRS determined that the FBAR violation was due to
reasonable cause, no FBAR penalty will be asserted.
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. There may be factors in addition to those listed that weigh in favor
of a determination that a violation was due to reasonable cause. No single
factor is determinative.
Factors that might weigh against a determination that an FBAR violation was
due to 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. As with factors that might weigh in favor of a
determination that an FBAR violation was due to reasonable cause, there may be
other factors that weigh against a determination that a violation was due to
reasonable cause. No single factor is determinative.
Current IRS procedures state that an examiner may determine that the facts
and circumstances of a particular case do not justify asserting a penalty and
that instead an examiner should issue a warning letter. See IRM 4.26.16,
Report of Foreign Bank and Financial Accounts (FBAR). The IRS has
established penalty mitigation guidelines, but examiners may determine that a
penalty is not appropriate or that a lesser (or greater) penalty amount than the
guidelines would otherwise provide is appropriate. Examiners are instructed to
consider whether compliance objectives would be achieved by issuance of a
warning letter; whether the person who committed the violation had been
previously issued a warning letter or has been assessed the FBAR penalty; the
nature of the violation and the amounts involved; and the cooperation of the
taxpayer during the examination.
Example 4: Taxpayer is a United States citizen who lives and works in
Country B as a computer programmer. Taxpayer has checking and savings accounts
with a bank that is located in the city where he lives. The aggregate balance
of the checking and savings accounts is $50,000 during the tax year. Taxpayer
complied with Country B’s tax laws and properly reported all his income on
Country B tax returns. Taxpayer failed to file federal income tax returns and
failed to file FBARs to report his financial interest in the checking and
savings accounts. After reading recent press and thus learning of his federal
income tax return and FBAR reporting obligations, Taxpayer filed delinquent
FBARs, reporting both foreign accounts, and attached statements to the FBARs
explaining that he was previously unaware of his obligation to report the
accounts on an FBAR. Taxpayer also filed federal income tax returns properly
reporting all income and no tax was due. The IRS will determine whether the
FBAR violation was due to reasonable cause based on all the facts and
circumstances. Taxpayer had a legitimate purpose for maintaining the foreign
accounts, there were no indications of efforts taken to intentionally conceal
the reporting of income or assets, and no tax was due. Taxpayer’s explanation
for why he failed to timely file an FBAR appears reasonable in view of the facts
and circumstances of the case. Since the IRS determined that the FBAR violation
was due to reasonable cause, no FBAR penalty will be asserted.
7. New reporting requirement for foreign financial
assets
A new law requires U.S. taxpayers who have an interest in certain specified
foreign financial assets with an aggregate value exceeding $50,000 to report
those assets to the IRS. This reporting will be required beginning in 2012.
Taxpayers who are required to report must submit Form 8938 with their tax
return. See Notice
2011-55 for additional information about this reporting requirement under
IRC section 6038D. |
|
|
No comments:
Post a Comment