Part I: What is “Willful” and what is “Non-Willful” for USCs and LPRs Residing Overseas Who Have Not Filed U.S. Tax Returns or FBARs?
This will be one of the most important questions to understand for any USC or LPR residing outside the U.S. who has not been filing U.S. income tax returns or FBARs. See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
The willfulness question is important, when the USC or LPR decides what steps they need to take regarding the filing of U.S. income tax returns.
A LPR residing predominantly in a country with a US. income tax treaty (of which there are 68) may be in the best position to “clean up” their U.S. tax filing and return positions. Specifically their facts might allow them to file as a non-resident under the “tie-breaker provisions” – typically Article 4); and indeed such filings might be applicable for several prior years.
See, Countries with U.S. Income Tax Treaties & Lawful Permanent Residents (“Oops – Did I Expatriate”?) for a comprehensive list of each income tax treaty and country.
The issue of “expatriation” becomes front and center for the LPR who notifies the IRS that he or she is not a resident of the U.S, pursuant to an applicable income tax treaty and files the treaty position accordingly.
Specifically, the statutory language of IRC Section 7701(b)(6) has three tests for when the individual is no longer a LPR for federal tax purposes:
- The individual is treated as a resident of a foreign country under the provisions of a tax treaty;
- The individual does not waive the benefits of the treaty, and
- Notifies the Secretary of the commencement of such treatment.
If the LPR has had that status for the requisite number of 8 years or more, to be treated as a “long term resident”, he or she would generally be subject to the “exit tax” of Sections 877 and 877A (plus a tax to any future U.S. persons who receive gifts or inheritances from such former LPR). See, The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.”
If the LPR has not been “non-willful” (double negative intended) by not filing U.S. income tax returns, interesting legal questions are raised as to the consequences to the LPR.
In addition, the IRS “streamlined” procedure announced on June 18th, 2014, has specific requirements obligating the taxpayer to certify “non-willful” behavior.
Various consequences of signing these certifications under penalty of perjury, will be discussed in later posts.
