What is a dual national or expatriate for U.S. tax purposes?
A dual national is a U.S. naturalized citizen or permanent resident who retains citizenship of another country. An expatriate is a U.S. citizen who relocates to another country and becomes a citizen of that country while retaining U.S. citizenship.
Are dual nationals and expatriates subject to income tax on non-U.S. income?
Yes, all income of U.S. citizens and permanent residents is subject to taxation, regardless of country of origin. Various credits and double taxation treaties may determine specific items of inclusion or exclusion and tax rates.
Are foreign-held assets includible in U.S. estate taxes?
Yes, like income, a U.S. taxpayer’s estate includes all assets wherever they are located.
Must foreign gifts and bequests be reported to the IRS?
Yes; gifts or bequests from foreign sources must be reported if they currently exceed $100,000 per year per recipient.
If I have an interest in an offshore business, must I report the income?
Depending on how you hold the business interest (directly or indirectly), such as through a trust, corporation or partnership, each form of ownership has its own reporting requirements.
Do I need to report an interest in an offshore investment company?
If you have an interest in a Passive Foreign Investment Company (PFIC) its income must be reported as part of your worldwide income. PFICs are companies that have least 75 percent of their income from passive income or have at least 50 percent of their assets composed of passive assets.
Do I need to report all foreign financial accounts which I have control over, even if indirectly?
Yes; a Report of Foreign Bank Account (FBAR), is due if you have direct or indirect control of foreign financial accounts that aggregate $10,000 or more per year. Such accounts include bank accounts, brokerage accounts and other financial instruments. Therefore, if you have an interest in an offshore business and can control or direct the payment or use of funds, an FBAR is required annually.
My tax preparer has told me that I must disclose certain offshore holdings beginning with my 2011 income tax return. Is this true?
If you have what are known as “specified foreign financial assets” and the value of those assets is $50,000 or more, those assets must be disclosed on a schedule (Form 8938) which will be part of your income tax return.
How will the IRS find out if I have reportable offshore income or assets?
Your tax preparer may ask specific questions that will lead him/her to determine that you have reportable income or assets. There are significant penalties that can be imposed by the IRS if the tax preparer knowingly prepares a false or misleading return. These penalties including possible disbarment from practice before the IRS and criminal prosecution. Further, offshore banks are now providing information about accountholders who are U.S. residents. Many offshore banks have already advised U.S. resident accountholders to move their accounts or prove compliance with U.S. reporting requirements.
What are the penalties for not complying with U.S. reporting and disclosure rules?
Failure to accurately disclose your income and assets can lead to many harsh civil penalties. The penalties that may be charged depend upon the facts and circumstances of your specific situation.
Failure to report foreign bank accounts (formerly known as FBAR):
If you had foreign accounts that aggregated more than $10,000 at any point during the year, you must report that income on your tax return. If the IRS determines your failure to report was “willful” you may be charged with a civil penalty equal to 50 percent of the total balance of the accounts, or $100,000 — whichever is greater. Nonwillful violations are subject to a $10,000 penalty.
Failure to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts:
If you have a foreign trust, you must report all transactions it engaged in, as well as the receipt of any foreign gifts. Failure to report trust transactions results in a civil fine equal to 35 percent of the value of the reportable amount. Failure to report foreign gifts may result in a fine of 5 percent of the value of the gift per month, up to 25 percent of the total value.
Failure to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner:
If you have an ownership interest in a foreign trust, and fail to report it, you can be hit with a civil penalty up to 5 percent of the gross value of the trust.
A penalty for failure to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations:
If you are an officer, director or shareholder of a foreign corporation, you must report that information to the IRS annually. Failure to report may result in a $10,000 penalty. An additional $10,000 will be charged every 90 days up to $50,000 until you are compliant.
Failure to file Form 5472, Information Return of a 25 Percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business:
Depending on the circumstances, you may be required to report certain transactions. Failure to do so may result in a $10,000 penalty, with an additional $10,000 added each month you are delinquent, up to $50,000 total.
Failure to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation:
Transfers of property to foreign corporations must be reported. Failure to do so can result in a penalty equal to 10 percent of the value of transferred property up to $10,000. If failure to report is found to be intentional, there is no cap on the penalty.
Failure to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships:
If you have an interest in a foreign partnership, you must report certain transactions the partnership engages in. Failure to do so may result in a penalty of $10,000 per transaction, plus an additional $10,000 fine every month of delinquency after 90 days. The maximum penalty is $50,000 per return plus 10 percent the value of the transferred property up to $100,000.
Failure to file a tax return or underpayment of tax:
If the IRS determines your failure to file a return or underpayment was due to fraud, a penalty up to 75 percent of the underpayment may be charged.
If your failure to file a tax return or failure to pay your tax liability was not due to fraud, the IRS may still charge you with a penalty up to 5 percent of the delinquent amount, plus 5 percent each month you are delinquent, up to 25 percent total.
You may also be charged an accuracy-related penalty between 20 to 40 percent of the total amount owed.
Are criminal charges possible for noncompliance?
Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to 10 years and criminal penalties of up to $500,000.
Is it possible to avoid or minimize the penalties for noncompliance?
Yes; depending upon the specific facts and circumstances of the noncompliance, a variety of legal options may be available to establish that there is a “reasonable cause” for your actions. Alternatively, failure to act may lead the IRS to conclude that your conduct was “willful” once your noncompliance is discovered, resulting in harsh penalties.
Are there planning strategies to reduce the effects of having foreign-source income and/or foreign-held assets?
Yes; depending on your specific facts and circumstances, many planning options exist. The options depend upon a variety of factors, including the nature of the income or assets held, the country (or countries) involved, the effect of tax treaties and many other factors.
Where can I find additional information?
You can visit the IRS website, www.IRS.gov, or go to the IRS YouTube channel for informational videos at http://www.irsvideos.gov.