IRS Clarifies FBAR For US Citizens Abroad

By Editorial 12 December, 2011

Following the recent disclosure by the American Embassy in Ottawa that an easing of reporting rules would shortly be announced for United States citizens living in Canada, the Internal Revenue Service (IRS) has issued a fact sheet summarizing information about federal income tax returns and Foreign Bank Account Report (FBAR) filing requirements, and the potential penalties.

Under the IRS's FBAR rules, any US person (not necessarily a US resident) who has a financial interest in or signature authority, or other authority, over any financial account in a foreign country, if the aggregate value of these accounts exceeds USD10,000 at any time during the calendar year, is required to file a return.

However, the IRS says that it knows that some who are dual citizens of the US and a foreign country may have failed to timely file US federal income tax or FBAR returns, despite being required to do so. Furthermore, it is also aware that some are now aware of their filing obligations and seek to come into compliance with the law.

It confirms that penalties will not be imposed in all cases. Those who owe no US tax (for example, due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties. In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause, and not due to wilful intent to avoid filing.

It is explained that whether a failure to file or failure to pay is due to reasonable cause is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when a person demonstrates that he exercised ordinary business care and prudence in meeting his obligations but nevertheless failed to meet them.

Of particular interest to dual citizens living abroad, it is specified that reasonable cause may be established if the citizen shows that he was not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances. A person may have reasonable cause for noncompliance due to ignorance of the law if he was unaware of the requirement and could not reasonably be expected to know of the requirement.

The IRS suggests that, on learning of a requirement to file FBARs for earlier years, a dual citizen should file the delinquent FBARs and attach a statement explaining why they are filed late.

The FBAR is considered by the IRS as a tool to help the US government to identify persons who may be using foreign financial accounts to circumvent US law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

However, Canadian Finance Minister Jim Flaherty had, in an open letter to the media written in September this year, pointed out the difficulty which the FBAR rules caused to the many dual US-Canadian citizens and their relatives living in Canada, the majority of whom, he said, hold only distant links with the US and were, therefore, unaware of the disclosure rules.

"Because they work and pay taxes in Canada, they generally do not owe any taxes in the United States in any event. Their only transgression is failing to file the IRS paperwork they were never aware they were required to file," he observed.

Tags: Individuals | Expatriates | Compliance | Tax | Investment | Tax Compliance | Law | Banking | Internal Revenue Service (IRS) | Enforcement | Tax Authority | Offshore | Canada | United States | Penalties |


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