On December 7, 2011, the IRS issued guidance for dual citizens of the United States and a foreign country who failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs). The guidance, FS-2011-13, is found at http://www.irs.gov/newsroom/article/0,,id=250788,00.html.
Under FS-2011-13, dual citizens who fail to file U.S. tax returns or FBARs will not be automatically imposed penalties. Taxpayers will not owe U.S. tax penalties if they owe no U.S. tax. For instance, they do not owe taxes because of the application of the foreign earned income exclusion or foreign tax credits, or failure was due to reasonable cause.
The IRS often grants a failure is due to reasonable cause when the taxpayer exercised ordinary business care and prudence in meeting the tax obligations but failed to meet them. This may happen when the taxpayer establishes the taxpayer was not aware of particular obligations to file returns or pay taxes. The IRS considers education, history of being subject to federal income tax or penalties, changes in the tax forms or law the taxpayer could not reasonably be expected to know, and the complexity of a tax.
A FBAR must be filed by any United States person by June 30 of the year following the calendar year in which the United States person (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) where the aggregate value exceeds $10,000 at any time during the calendar year. Read 31 C.F.R.§1010.350(a); TD F 90-22.1 (Rev. 3-2011).
A FBAR violation may be due to reasonable cause when the taxpayer relies on the advice of a professional tax advisor who was informed of the existence of the foreign financial account. If this happens, the unreported account must be established for a legitimate purpose. There must not be no indications of intentional concealment of the reporting of income or assets. There should be no tax deficiency, or if there is a tax deficiency, the amount is de minimis.
Factors that weigh against a finding of reasonable cause in a FBAR violation include whether the taxpayer’s background and education show s/he should have known of the FBAR reporting requirements, if there was a tax deficiency related to the unreported foreign account, and if the taxpayer did not disclose the account existence to the person preparing the tax return.
Consult with an experienced New York tax attorney to prevent late tax filings and penalties.