- 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. A 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 where ever 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. PFIC’s are companies that have least 75% of their income from passive income or have at least 50% of their assets composed of passive assets.
- Do I need to report all foreign financial accounts which I 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 holding 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 that 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 account holder that are U.S. residents. Many offshore banks have already advised U.S. resident account holders to move their accounts or prove compliance with U.S. reporting requirements.
- What are the penalties for not complying with these reporting and disclosure rules?
Depending on a taxpayer’s particular facts and circumstances, the following civil penalties could apply:
- A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”). United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
- A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048.This return also reports the receipt of gifts from foreign entities under section 6039F.The penalty for failing to file each one of these information returns, or for filing an incomplete return, is 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
- A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b).The penalty for failing to file each one of these information returns or for filing an incomplete return, is five percent of the gross value of trust assets determined to be owned by the United States person.
- A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046.The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
- A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
- A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
- A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
- Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
- A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
- A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
- Are criminal charges possible for non-compliance?
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 ten years and criminal penalties of up to $500,000.
- Is it possible avoid or minimize the penalties for non-compliance?
Yes, depending upon the specific facts and circumstances of the non-compliance a variety of legal options may be available to establish that there is a “reasonable cause” for you actions. Alternatively, failure to act may lead the IRS to conclude that your conduct was “willful” once your non-compliance is discovered, resulting in harsh penalties.
- Are their 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, http://www.irsvideos.gov.
Click Tax Videos to see some of Sanford I. Millar’s tax videos.
Click Los Angeles Tax Attorney to get back to our home page.