US Citizens Living outside the
United States – You Must File
United States citizens living abroad generally must file a U.S. income tax return each year, even if they may exclude their income pursuant to the Earned Income Exclusion. In fact, timely filing of tax returns ensures that the benefits of the exclusion may be claimed. If you are a U.S. citizen living abroad and have not filed your U.S. income tax returns, you should file the returns immediately.
Failure to file your income tax returns when due may result in a denial of your passport renewal application, together with other penalties imposed by the Internal Revenue Code.
Foreign tax credits are available to persons who find themselves taxable by more than one country on the same income, in cases where the United States has a treaty with the other taxing country in which you reside. Generally, U.S. citizens living abroad in a treaty country may claim a credit based on the taxes paid to the treaty country on all income except income excluded by the Earned Income Exclusion.
Alternative minimum tax is a tax calculated on income without giving regard to certain preference amounts, including the Earned Income Exclusion. As a result of the workings of AMT, and the limitation of the AMT foreign tax credit to 90% of the tax paid to the treaty country, some tax may be payable by you even if a combination of the Earned Income Exclusion and the foreign tax credit would otherwise result in no tax payable.
New Developments in International Taxation for Expatriates
As of September 1, 2012 there are four new options available to help U.S taxpayers living abroad become compliant.
Internal Revenue Service has issued FAQ'S which deal with non filers and the current voluntary disclosure program, and the treatment afforded to them. Since participation in the 2012 Offshore Voluntary Disclosure Program (OVDP) can give rise to penalties, and is quite complex, several FAQ's are intended to identify areas and situations which need not participate in the OVDP, and should simply file the delinquent returns and compliance filings.
OPTION #1
OVDP FAQ #17: This applies to any taxpayer who has properly reported all taxable income in the U.S., but has simply not filed foreign bank account (FBAR) reporting forms. Under this scenario, and assuming that the failure to file was not willful, it is not recommended that the 2012 Offshore Voluntary Disclosure Program (OVDP) be used, and that the delinquent forms be filed in the normal manner (for the past six years), together with an explanation of the late filing.
OPTION #2
OVDP FAQ #18
: This FAQ refers to taxpayers who have properly reported all taxable income, but have failed to file any of the following forms. Under these rules, if no tax is owing, no penalty will be assessed if these forms are filed in the normal manner, together with an explanation of the late filing.
-5471 - Controlled Foreign Corporations
-3520 - Annual Return to Report Transactions With Foreign Trusts
-3520A - Annual Information Return of Foreign TrustWith a U.S. Owner
-5472 - Information Returnsf a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
-8558 - Information Return of U.S. Persons With Respect to certain Foreign Partnerships
-8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships
-8938 - Statement of Specified Foreign Financial Assets
Accordingly, participation in any of the voluntary disclosure procedures may not be necessary if you fall within the above conditions.
OPTION #3
The New Streamlined Filing Compliance Procedures is now available in situations which the IRS has classified as "low risk", and permit the filing of:
- FBAR compliance forms for six years; and
- Income Tax Returns for three years
Information used in the determination of risk can be obtained in the IRS questionnaire.
Compliance requirements under the New Streamlined Filing Compliance Procedures are substantially less complicated than the usual OVDP disclosure procedure.
Filing under the New Streamlined Filing Compliance Procedures, however, does not guarantee acceptance of the returns under this procedure, if your situation is deemed to be of higher risk. In fact, filing under this procedure may bring a potential penalty and criminal prosecution action to the attention of IRS.
Taxpayers who are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer's particular circumstances warrant such prosecution.
Once a Taxpayer files under the New Streamlined Filing Compliance Procedures, participation in the normal2012 Offshore Voluntary Disclosure Program(OVDP) is no longer available and there is a risk for higher penalties and/or criminal prosecution.
Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the 2012 Offshore Voluntary Disclosure Program(OVDP), announced on January 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. We are available to discuss your options with you in context of your specific situation in order that you may make the proper decisions related to your U.S. tax compliance filings.
