The United States’ taxation system is not one of the more common regimes seen throughout the world. While most countries tax based on residence, or presence, the U.S. taxes its citizens’ worldwide income. However, being subject to U.S. tax does not necessarily exempt one from taxes in foreign countries. The U.S. has tax treaties with many different nations, which shift tax burdens between the U.S. and other countries. For example, while any person is generally liable to the U.S. for all income, if the income stems from a rental property, that income might only taxable in the country where it is located. For this reason, U.S. citizens living abroad should be especially interested in consulting qualified tax professionals.
There is another very important issue that U.S. citizens living abroad should consider. All persons subject to U.S. income taxes have an obligation to report certain bank accounts, regardless of whether the amounts in those accounts are subject to U.S. taxation. The general requirements for filing are:
- Having an interest or signature authority over an account; and
- Having assets in such accounts that is at least $10,000.
When those two conditions are met, taxpayers generally have an obligation to file a Financial Bank Account Report (“FBAR”) (although there are exceptions).
The FBAR is generally filed online and the due date is June 30, each year. When a person fails to file these reports, there can be significant consequences. The penalty for “non-willful” failure to file FBARs is capped at $10,000; the penalty for willful failure to file can be the greater of $100,000 or half of the value of the accounts. There can also be criminal penalties, with penalties that can include a $500,000 fine and five years imprisonment.
If you have yet to file any FBARs, the IRS has instituted a program called the Offshore Voluntary Disclosure Program (OVDI). This program was designed to achieve voluntary compliance for taxpayers who might otherwise be in violation of foreign asset reporting requirements, which can result in criminal penalties. According to the IRS,
“When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice for any issue relating to tax noncompliance or failure to file Report of Foreign Bank and Financial Accounts (commonly known as an FBAR reported on FinCEN Form 114, previously Form TD F 90-22.1).”Linda de Marlor, president of Tax-Masters, will be a featured speaker at our Dare 2 Escape conference October 10-12 at Walt Disney World in Orlando, FL. Get the details here, then register today!
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