Federal Income Tax Relief for U.S. Citizens and Dual Citizens Living Abroad

By Baker Newman Noyes July 1, 2012

All U.S. and dual citizens, regardless of current residence, must file federal income tax returns if their gross income from all sources is greater than the combined exemption and standard deduction amounts.  These rules apply even if the taxpayer pays taxes to a foreign authority, although a foreign tax credit and foreign earned income exclusion may be available in the U.S. in this case, to mitigate double taxation.  Taxpayers also may have to file Form TD F 90-22, Report of Foreign Bank and Financial Accounts (FBAR), if they have a financial interest or signature authority over foreign accounts exceeding $10,000.

The penalties for failing to follow these rules can be substantial.  For federal income tax purposes, failing to file may result in a penalty of 5% of the tax due for every month until the return is filed.  The penalty for unintentionally failing to file the FBAR is a maximum of $10,000, and significantly more if the violation was willful.  It is clear that these penalties add up quickly and can be a major problem for many people.

The IRS is aware that many U.S. and dual citizen taxpayers previously were uninformed of these filing requirements and have recently shown an interest in complying with them.  In an effort to assist taxpayers and reduce their burden complying with these rules, the IRS has developed new procedures to assist U.S. citizens residing overseas, effective September 1, 2012.  The IRS will begin allowing delinquent tax payers with low compliance risks to file their late returns without facing penalties.  This includes taxpayers who owe tax of less than $1,500 for each year.  Under these new procedures, U.S. citizens residing abroad will be required to file federal income tax returns for the past three years, as well as FBARs for the past six years, and must include a statement showing reasonable cause for late filing.

More details on this subject are expected to be announced as the effective date approaches.  In the meantime, this seems to be a promising response to the dilemma that many U.S citizens are currently facing. If you need assistance or have questions concerning current or past U.S. tax filing obligations, please contact our International Tax Practice Leader, Stuart Lyons at 1.800.244.7444.