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Are you one of the seven million U.S. citizens or green card holders living abroad? If you are, the IRS has a simple message: We’re looking for YOU.
Congress, the U.S. Treasury, and the IRS are moving forward on several fronts to identify millions of foreign residents it believes are subject to U.S. tax and reporting obligations, but are not complying with them. You see, the United States is the only major country that imposes the same tax and reporting obligations on its non-resident citizens as on U.S. residents. Long-term U.S. residents (green card holders) living abroad face the same obligations, even if the green card is expired. You must comply with these requirements even if you pay tax in the country in which you now live.
The United States is also one of the few countries that awards citizenship to anyone born in its territory. You’re also are a U.S. citizen if you have at least one U.S. citizen parent and that parent met certain residency or physical presence requirements prior to your birth. Combine the sweeping claims of taxing authority with the extraordinary ease of qualifying for U.S. citizenship, and you can understand why millions of U.S. citizens living abroad who don’t comply with these requirements now have a king-size problem.
Yes, millions. There’s no consensus on how many U.S. citizens living abroad, but the State Department estimates the total number at around 7 million. Yet, the IRS believes that only a small percentage of these individuals file U.S. tax and information reporting returns. Mind you, there’s rarely any tax evasion, because Americans living abroad usually pay tax in the country they’re living in. But, you’re still supposed to file U.S. tax returns and reporting forms acknowledging offshore accounts and offshore entities you’ve created or in which you have an interest.
Perhaps you were born in the United States, but grew up abroad. Or maybe you grew up outside the United States, but have a U.S. parent. It doesn’t matter if you haven’t visited the United States in decades, or even if your feet have ever touched U.S. soil. Bare your soul to the IRS, and write a large check, or face the consequences.
Thinking about not complying? Here are the penalties you face:
Failure to file a U.S. tax return. Once you’re discovered, you face a penalty of 5% of the balance due, plus an additional 5% per month, up to a maximum of 25%.
Failure to pay U.S. tax due. Count on another 5% monthly penalty on the tax you owe, up to 25%. You can be dunned another 20%-40% for failing to file an “accurate” tax return. Fortunately, if you’ve filed tax in another country, you can generally set off the tax you paid in that country against your U.S. tax obligations.
Fraud penalties. If you fail to file a return or to pay tax due and the IRS can demonstrate fraud, you can be liable to penalties that amount to as much as 75% of the unpaid tax.
Failure to disclose offshore financial accounts. Any U.S. citizen or green card holder with non-U.S. bank, securities or “other” financial accounts must report them if their aggregate value exceeds $10,000 on Form TD F 90-22.1 (“FBAR”). The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation. Criminal penalties may also apply for willful violations. Non-willful violations are subject to a $10,000 penalty per account per year.
Failure to file reporting forms for foreign trusts or foreign business entities. U.S. citizens who create or fund a foreign trust or any foreign business entity such as an offshore corporation must make extensive disclosures. Penalties for failing to do so are draconian. For instance, if you own property in Mexico through a Mexican trust (“Fideicomiso”), you must tell the IRS when you form, fund, or make a transaction involving the trust. The penalty for failing to file just one of these forms (Form 3520) is 35% of the amount that should have been reported. Thus, if you formed a Fideicomiso, then transferred $100,000 to it to purchase property in Mexico, and didn’t file Form 3520, you owe the IRS $35,000. Stiff penalties also apply for failure to file information returns relating to foreign corporations, foreign partnerships, etc.
Are you depressed yet? You should be, if you’re not compliant with this draconian tax and reporting regime. In Part II, I’ll describe Uncle Sam’s greatly increased efforts to extract as much revenue as possible from its non-resident citizens and green card holders. I’ll also discuss how you can become compliant if you’re in this situation without paying the maximum penalties. Finally, I’ll show you how to legally and permanently eliminate your obligation to file U.S. tax and reporting forms. Stay tuned!
Reprinted with permission from The Nestmann Group, Ltd.
