What Is the IRS Non-Filer Program and How Does It Affect Americans Abroad?
U.S. Citizens and Green-Card Holders Abroad: The IRS Non-Filer Program Explained
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What is U.S. citizenship-based taxation, and who does it reach?
The U.S. taxes based on citizenship, not just on where a person lives. A U.S. citizen who has spent nearly all of their life outside the U.S. can still fall within the U.S. tax system. Lawful permanent residents (green-card holders, also called LPRs) residing outside the U.S. can be reached as well. Many people in both groups are shocked to learn how broad this scope is.
Why does the IRS focus so heavily on accounts and assets outside the U.S.?
In recent years the IRS and the Tax Division of the Department of Justice (DOJ) have aggressively pursued assets and accounts located outside the U.S. That pursuit has put a keen focus on the offshore holdings of U.S. citizens and green-card holders who live abroad.
What are the “New Filing Compliance Procedures for Non-Resident U.S. Taxpayers”?
In August the IRS articulated its position for U.S. citizens and lawful permanent residents residing outside the U.S. in a document titled “New Filing Compliance Procedures for Non-Resident U.S. Taxpayers.” It sets out how the IRS approaches the filing obligations of those taxpayers.
What is the IRS non-filer program?
The IRS has had, for years, a specific program aimed at “non-filers,” meaning persons who do not file U.S. income tax returns. The program is detailed in the Internal Revenue Manual (IRM), the IRS’s internal handbook of procedures. It can apply to U.S. citizens and green-card holders living overseas who have not filed.
What can happen if a U.S. citizen or green-card holder living abroad never files a U.S. return?
When a taxpayer does not file, the IRS may prepare a “substitute return” on that person’s behalf. A substitute return is a return the IRS files for the taxpayer, rather than one the taxpayer files. This can apply to U.S. citizens and lawful permanent residents residing overseas who are non-filers. Anyone facing this situation may want to consult an experienced attorney.
Where is the non-filer program actually written down?
The non-filer program is laid out in the Internal Revenue Manual at section 4.19.17, the Non-Filer Program. Its subsections cover the full process:
- 4.19.17.1 — Non-Filer Program
- 4.19.17.2 — Non-Filer Strategy
- 4.19.17.3 — Non-Filer Processing
- 4.19.17.4 — Non-Filer Penalties
- 4.19.17.5 — Undelivered Mail
- 4.19.17.6 — Taxpayer Replies
- 4.19.17.7 — Closures, Non-Examined
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What Is the Difference Between Relinquishing and Renouncing US Citizenship?
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Is there a legal difference between “relinquishing” and “renouncing” U.S. citizenship for tax purposes?
For U.S. federal tax purposes, “relinquish” and “renounce” are in effect interchangeable. Many people assume the two words carry an important legal distinction. For federal tax purposes, they generally do not. This question was first taken up in an earlier post dated June 21, 2014. The expatriation tax statute, IRC Sections 877 and 877A (the U.S. tax rules that apply when a person gives up U.S. citizenship), uses both terms in the same breath. What drives the tax result is not which word applies but the “expatriation date.”
What date actually matters under the U.S. expatriation tax rules?
The key time reference is the “expatriation date.” Under IRC Sections 877 and 877A (the U.S. expatriation tax rules), this date is defined in Section 877A(g)(3). It focuses on specific dates tied to meetings or events with the U.S. Department of State. Because the tax outcome turns on this date, the choice between the words “relinquish” and “renounce” does not, by itself, change it.
Why don’t the words “relinquish” and “renounce” change the tax outcome?
Both words point to the same thing under the tax law. The expatriation tax statute, IRC Sections 877 and 877A, uses “renounce” and “relinquish” in the same breath. The result instead depends on the “expatriation date” defined in Section 877A(g)(3), which is tied to specific meetings or events with the U.S. Department of State. So the terminology a person uses does not, on its own, change the federal tax treatment.
Consult an experienced attorney about how these rules apply to a specific situation.
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Why Are Foreign Banks Closing Accounts for Americans Abroad?
Is it hype, or is it real? Many U.S. citizens and lawful permanent residents (green-card holders) living overseas have heard that foreign banks are closing their accounts. Here is what actually shows up in practice, and why so many people are moving their money home.
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Are foreign banks really closing the accounts of Americans living overseas?
It is hard to know with certainty how accurate these claims are. If it has happened to you, of course you will know it. In practice, account closings have turned up in places such as Hong Kong, London, Geneva, and Zurich. But they do not appear to be a widespread practice, at least not anecdotally.
What have news reports said about banks cutting off American expats?
Several published reports have raised the issue, including:
- The Wall Street Journal, “Expats Left Frustrated as Banks Cut Services Abroad” (11 Sept 2014).
- The Wall Street Journal opinion piece by Colleen Graffy, “How to Lose Friends, Citizens and Influence.”
- Time Magazine, “Swiss Banks Tell American Expats to Empty Their Accounts.”
- The Huffington Post (Aug 2014), “Expatriate Tax Sense or Broad-Brush Overreach: The U.S. Foreign Account Tax Compliance Act (FATCA).”
- The New York Times (April 2013), “Overseas Finances Can Trip Up Americans Abroad.”
- The Association of Americans Resident Overseas, on Americans abroad being denied access to banking and investment opportunities.
- American Citizens Abroad, which compiles various news accounts of accounts being closed.
Does the size of the account change how a foreign bank responds?
It appears to. For individuals with large investment accounts, for example greater than US$1 million, banks seem to accommodate them, or at least require them to move their assets to a U.S. affiliate or branch. Those with smaller accounts, for example less than US$100,000, appear to see a broader brush stroke of closures.
If foreign banks aren’t the main driver, who is closing these accounts?
Much of it is the individual’s own decision, not the bank’s. What has been widespread in practice is a plan by individuals to close foreign financial accounts and relocate the assets to a U.S. financial institution. This includes U.S. citizens and lawful permanent residents (green-card holders) living outside the U.S. The move is the individual’s choice, not the financial institution’s.
Why are U.S. citizens and green-card holders abroad choosing to close their foreign accounts?
The reason is generally not FATCA (the Foreign Account Tax Compliance Act) itself, but a desire to reduce the compliance costs of filing and reporting on foreign accounts. FATCA seeks to co-opt foreign banks as long-arm enforcement of U.S. tax law. Even so, the driver people cite is cost, not the statute. Multiple tiers of reporting of foreign assets is now required. It can cost a small fortune to retain a good international tax adviser who is aware of these reporting requirements.
What reporting makes holding foreign accounts so expensive?
Two main layers apply to U.S. citizens and lawful permanent residents living outside the U.S.: the FBAR (the Foreign Bank Account Report) and IRS Form 8938 (Specified Foreign Financial Assets). For those with significant assets and numerous accounts, the professional fees and costs of reporting these accounts accurately can become exorbitant. That is especially true when the risk of potentially devastating civil penalties is weighed into the mix.
What penalties are people worried about?
The IRS now regularly threatens large, multiple-year 50% willfulness penalties for those who did not file an FBAR. This risk is more than just perceived. The Zwerner FBAR case is one example, and it has been described as probably a Pyrrhic victory for the government for U.S. citizens and lawful permanent residents living outside the U.S. The combination of cost, compliance burden, and penalty risk is what drives many people to act.
Is it actually illegal for a U.S. person to hold a foreign bank account?
No. There is no legal restriction for a U.S. citizen to hold foreign accounts. A U.S. citizen or lawful permanent resident residing outside the U.S. will generally find it easier, from a lifestyle and personal financial management perspective, to have an account in their home country. The irony is that the practical effect pushes in the opposite direction.
Where are these assets ending up?
The practical effect, anecdotally, is that U.S. financial institutions are receiving these assets and investments. As individuals close foreign accounts to cut compliance costs and penalty risk, the money flows back into the U.S. rather than staying in their home country abroad.
Read the full analysis here.
Can You Lose Your Green Card for Tax Purposes Just by Moving Abroad?
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Can you keep your green card and still “expatriate” for US tax purposes?
Yes. Many lawful permanent residents (LPRs, or green card holders) assume they have not “expatriated” for US tax purposes as long as they have not handed their green card back to US Citizenship and Immigration Services (USCIS). That assumption can lead to a rude awakening. Under IRC Section 7701(b)(6), a green card holder can cease to be treated as a lawful permanent resident for federal tax purposes without ever formally abandoning the card with USCIS. See, an article written by Patrick W. Martin on this subject a dozen years ago: See, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9).
What is IRC Section 7701(b)(6)?
IRC Section 7701(b)(6) is a provision Congress added in 2008 that says when a green card holder stops being treated as a lawful permanent resident for federal tax purposes. The relevant part provides that an individual shall cease to be treated as a lawful permanent resident if the individual commences to be treated as a resident of a foreign country under a tax treaty between the United States and that country, does not waive the benefits of the treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
What are the three tests for losing LPR status under Section 7701(b)(6)?
The statutory language sets out three tests. A green card holder is no longer an LPR for federal tax purposes when all three are met:
- 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 that treaty; and
- The individual notifies the Secretary of the commencement of such treatment.
It can get more complicated than this too – depending upon the interpretation of the laws in various tax treaties.
It can. Each of the three tests under Section 7701(b)(6) appears to be satisfied by a green card holder who files IRS Form 1040NR as a non-resident while living in a country that has a US income tax treaty. In that situation the individual may be treated as having ceased to be a lawful permanent resident for federal tax purposes, even though the green card itself was never returned to USCIS.
What happens once you stop being a lawful permanent resident under the tax law?
There can be a host of unintended consequences for an individual who ceases to be a lawful permanent resident under the federal tax law. The expatriation provisions of Section 877A and Section 2801, among others, can be implicated, along with many other provisions of the law. For background, see “Accidental Americans” – Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web,” International Tax Journal, CCH Wolters Kluwer, Nov./Dec. 2012, Vol. 38 Issue 6, p45.
For those who wish to formally abandon their lawful permanent resident status, there is a specific DHS/USCIS form used for that purpose: Form I-407. Filing this form is the route to formally relinquishing the green card with the immigration authorities, which is separate from the tax-law treatment described above under Section 7701(b)(6).
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What Are the Risks of Using the IRS Streamlined Filing Program?
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The IRS announced a new “streamlined” filing program in June 2014 for US citizens and lawful permanent residents with unreported foreign accounts. Here is how the program works and where its legal risks lie.
What is the IRS “streamlined” program for offshore accounts?
The streamlined program is an administrative procedure the IRS announced in June 2014 for US citizens (USCs) and lawful permanent residents (LPRs, or green-card holders) who did not file US tax returns, information returns, or FBARs (FinCEN Form 114, the Foreign Bank Account Report) covering their foreign accounts. An earlier version was announced in June 2012 and has since been removed from the IRS website. The program asks the taxpayer to file under a certification, and for US residents to pay a “5% miscellaneous offshore penalty.” It is an administrative procedure, not a change in the underlying law.
Does the streamlined program give any legal protection or finality?
No. Legally speaking, this administrative procedure provides no legal protection or finality to the taxpayer. It does not protect against penalties for failure to file tax returns, failure to file information returns, or failure to file FBAR forms. It also does not protect against IRS audits of prior years while the statute of limitations is still open. The IRS or the Justice Department can still fully pursue a US citizen or green-card holder who did not properly file US income tax returns, information returns on foreign assets, or FBARs for prior years, as provided under the law.
What is the “5% miscellaneous offshore penalty”?
For US residents using the streamlined program, the “5% miscellaneous offshore penalty” is an amount equal to 5% of the relevant foreign assets that the taxpayer agrees to pay in order to participate. It is not a penalty that exists under the law in the first place, and it may have no correlation with any income taxes actually owing. As a result, a good-faith taxpayer who made an inadvertent mistake about complex tax provisions can end up paying a portion of their principal assets, not just tax.
Can the IRS be required to refund the 5% penalty if you change your mind?
No. Under the terms of the Certification, the government will never be required to refund the 5% miscellaneous offshore penalty. The taxpayer waives “all defenses against and restrictions on the assessment and collection of the [5%] miscellaneous offshore penalty.” It is a one-way street. Once the money is paid it does not come back, even though the penalty is not something contemplated under Title 26.
What does the streamlined certification require, and who wrote it?
The certification is a statement the taxpayer signs under penalties of perjury. It is not drafted in the taxpayer’s own words; it is drafted by the US federal government. By signing, an individual may expose themselves to greater liability if the government later wants to challenge the certification. The certification turns on terms like “negligence,” “inadvertence,” and a “mistake” that is a “good faith misunderstanding” of the law. It is entirely unclear how the government will interpret these terms in any particular case.
Can the government challenge your certification after you file?
Yes. The IRS’s limited resources mean the vast majority of streamlined cases likely will not be challenged. Even so, there are many ways a certification can be challenged against a particular taxpayer. For example, if a taxpayer threw away the monthly bank statements for a foreign account for the year 2012, that may breach the Certification, and the terms seem to provide that all bets are off against the taxpayer. Signing under penalties of perjury is what creates this exposure.
Could the government later decide you belonged in the OVDP instead?
Yes. Some practitioners expect the government to selectively pursue taxpayers who entered the streamlined process when it believes they should have gone in under the Offshore Voluntary Disclosure Program (OVDP) instead. That determination is made by the government, not the individual taxpayer, and it can put the taxpayer in further jeopardy after they have already filed under streamlined.
Why is the FBAR described as a “trap”?
The FBAR has been used as a trap for the taxpayer. If an individual did not check the right box on Schedule B, Part III of their tax return, the government may argue they were “willfully blind” of the FBAR filing requirements, even if they genuinely did not know about them. The FBAR regulations are extremely complex. Few tax experts anywhere could pass a basic exam on what counts as a “financial interest in” or “signature authority over” an account under these regulations, with many scoring only around 75%, a C or maybe D grade.
Does the streamlined program apply to green-card holders as well as US citizens?
Yes. The same exposure applies to both US citizens (USCs) and lawful permanent residents (LPRs, or green-card holders) who did not properly file US income tax returns, information returns on foreign assets such as IRS Form 8938, or FBARs. Both groups face the same lack of protection from penalties and audits. Both can be pursued by the IRS or the Justice Department for prior years.
A concrete example: why might the program produce an unjust result?
Consider Pierre, who moved from France to the US about 10 years ago. He was an accountant in France, his English is poor, and he relies on an English-only return preparer who never asked whether he held non-US assets. Pierre inherited Swiss and French accounts worth about US$3M, plus real estate outside Paris worth about US$2.5M that generates monthly rent. His preparer always checked the “No” boxes on Schedule B, Part III and never filed FBARs or IRS Form 8938. His sophisticated French advisers told him those European assets were taxable only in France and Switzerland. Foreign taxes withheld there exceed his US tax, so after the US foreign tax credit he owes less than US$1,000 of federal income tax. To join the streamlined program, he would pay about US$325,000, which is 5% of US$6.5M.
Why would a good-faith taxpayer pay $325,000 to settle a $1,000 tax bill?
This is the core unfairness of the program for US residents. A taxpayer like Pierre may owe less than US$1,000 in federal income tax, yet the 5% miscellaneous offshore penalty would require paying about US$325,000, a large portion of a family inheritance, for an inadvertent mistake about very complex rules. That US$325,000 is not contemplated under Title 26. There is no clear legal basis for requiring a good-faith taxpayer to hand over part of their principal to the government for an honest misunderstanding.
What are the choices if you do not enter the streamlined program?
A taxpayer in Pierre’s position faces two hard choices. The first is to comply under Title 26 by filing amended returns, and risk that the IRS and Justice Department pursue multiple-year 50% willfulness penalties by arguing he was “willfully blind,” as in the Zwerner case, even though the penalty for failing to file IRS Form 8938 is generally limited to 3 years at $10,000 per year. The second is to be forced into the streamlined procedure and pay a large portion of his European family inheritance to the US, simply because he did not file IRS Form 8938 or FBARs. Both paths carry real risk.
Read the full analysis here.
What Is a Certificate of Loss of Nationality and Why Does Your Bank Need It?
Who Is a “U.S. Person” for Tax, and How FATCA Treats Former Citizens and Green-Card Holders
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How does your immigration status decide whether you owe U.S. tax?
Your U.S. tax status starts with your immigration status. The U.S. taxes a “U.S. person” (the technical term used for U.S. federal tax purposes) on worldwide income, and whether you are a “U.S. person” depends largely on immigration concepts. Three immigration-based categories can make someone a U.S. person:
- U.S. citizenship;
- lawful permanent residency (a green card); and
- meeting the substantial presence test as a non-citizen.
A person in any of these categories may have U.S. income tax residency, and so may be subject to U.S. income tax on income earned anywhere in the world.
Who counts as a U.S. citizen for tax purposes?
Almost every individual born in the United States is a U.S. citizen under the 14th Amendment. Citizenship can also pass from a parent. A child born outside the U.S. to a U.S. citizen parent may also be a U.S. citizen at birth through “derivative citizenship,” meaning citizenship derived from a U.S. citizen parent. The U.S. Citizenship and Immigration Services (USCIS) publishes “Nationality Chart 1, for Children Born Outside U.S.” to help determine whether such a child was a U.S. citizen at birth. Because U.S. citizens are “U.S. persons,” they are generally subject to U.S. tax on their worldwide income.
Can a green-card holder or visa holder be a “U.S. person” too?
Yes. Two non-citizen categories can still make someone a “U.S. person” for tax. The first is a lawful permanent resident (LPR), a green-card holder; LPR status carries a series of complex rules that can affect “U.S. person” status. The second is a person who is neither a citizen nor an LPR but who meets the “substantial presence test,” a tax test based on the number of days an individual is physically present in the United States. A person in either category may be treated as a “U.S. person” and taxed on worldwide income.
What is FATCA, and why is your foreign bank asking if you are a U.S. person?
If your foreign bank has asked whether you are a U.S. person, FATCA is why. FATCA (the Foreign Account Tax Compliance Act, Chapter 4 of Subtitle A of the Internal Revenue Code) entered into force in January 2014. It imposes obligations on financial institutions (“FFI”) and basically all private companies and legal entities (“NFFE”) throughout the world to confirm whether they have any “U.S. person” account holders or owners. That worldwide duty to check is what leads banks and companies outside the U.S. to ask account holders about their U.S. status.
How does a former U.S. citizen prove they are no longer a “U.S. person”?
A former U.S. citizen must generally provide a Certificate of Loss of Nationality (CLN), Form DS-4083, to prove they are no longer a U.S. person. This is a specific requirement both under the FATCA regulations and under a provision adopted into the FATCA intergovernmental agreements (IGAs) signed between the U.S. and other countries. For example, Annex I of the IGA between the U.S. and Spain addresses CLNs. Without the CLN, a financial institution may continue to treat the individual as a U.S. person.
Why does a U.S. place of birth make foreign banks ask for extra proof?
A U.S. place of birth is a warning sign to a withholding agent. Under Treasury Regulations Section 1.1441–7T, a withholding agent has reason to know that documents claiming foreign status are unreliable if its records show an unambiguous U.S. place of birth. To still treat such an account holder as a foreign person, the agent generally needs documentary evidence of citizenship in a country other than the United States (described in § 1.1471–3(c)(5)(i)(B)), plus one of the following:
- a copy of the individual’s Certificate of Loss of Nationality (CLN); or
- a reasonable written explanation of the renunciation of U.S. citizenship, or of why the person did not obtain U.S. citizenship at birth.
Alternatively, a valid Form W–8 establishing the account holder’s foreign status, together with that citizenship evidence and the written explanation, may satisfy the requirement.
Once you are no longer a U.S. person, does FATCA reporting stop?
Generally yes, once the right documentation is on file. A person who is no longer a “U.S. person” can generally avoid FATCA reporting to the IRS by a foreign financial institution (FFI), or by a company or legal entity (NFFE) in any country outside the U.S. The condition is that the supporting documentation, namely the Certificate of Loss of Nationality (CLN), is provided to that institution or entity. Until the CLN reaches the institution, FATCA reporting on the account may continue.
What is an Apostille Certificate, and why pair it with a CLN?
An Apostille Certificate is an international authentication confirming that an official document is genuine for use in another country. When providing a Certificate of Loss of Nationality (CLN) to a foreign financial institution or company, it is often advisable to obtain an Apostille Certificate along with the CLN. Some third-party organizations will accept the CLN only when it carries this certification. Pairing the apostille with the CLN can help the document be accepted abroad.
Future posts will cover more on the interplay of FATCA and former U.S. citizens and lawful permanent residents.
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Why Covered Expatriate Status Affects You Even If You Have No Assets
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Does “covered expatriate” status only matter for wealthy people?
No. It is easy to assume the US expatriation tax rules only reach the rich, the wealthy, and the private-jet set. The press usually features wealthy renouncers like Tina Turner and Eduardo Saverin, the co-founder of Facebook, which fuels that assumption. But wealth is not the trigger. The rules can reach the poorest former US citizen, and certain long-term green card holders, wherever they live, if they fail the certification requirement in IRC Section 877(a)(2)(C).
What are the net worth and income tax tests people usually focus on?
Most coverage of expatriation focuses on two dollar thresholds. The first is the net worth test of US$2 million. The second is the income tax liability test of roughly US$125,000 of average annual net income tax. A “covered expatriate” is a former US citizen, or long-term green card holder, who on giving up that status either crosses one of those dollar thresholds or fails to certify tax compliance under Section 877(a)(2)(C). Because the headlines fixate on the dollar tests, the certification path is the one people miss.
Can you be a covered expatriate if you have no assets?
Yes. The certification requirement under Section 877(a)(2)(C) applies regardless of wealth. A former US citizen, or certain long-term green card holder, who cannot certify compliance becomes a “covered expatriate” even with almost nothing to their name. This is why the rules can reach so-called Accidental Americans who have spent little or no time in the US. The dollar thresholds are only one way in; failing to certify is another.
Does US expatriation tax apply to green card holders too?
Yes. The expatriation tax rules reach certain long-term lawful permanent residents (green card holders), not only US citizens. When a long-term LPR relinquishes or abandons their green card, the same certification requirement under Section 877(a)(2)(C) applies. A long-term LPR who cannot certify compliance becomes a covered expatriate on the same terms as a citizen who renounces.
If you have no assets, do you owe US income tax when you expatriate?
No. The expatriation income tax runs through a “mark-to-market” regime, which taxes unrealized gains as if you sold everything the day before you leave. With no assets, there are no unrealized gains, no tax base, and so no exit income tax. Even cash produces none. US dollars carry a tax basis equal to their face amount, so there is no unrealized gain on cash to tax.
What are the two points where expatriation can trigger US tax?
There are two. The first is the moment a US citizen or green card holder expatriates, that is, leaves the US tax system. This is the exit tax on unrealized gains, and it produces nothing for a person with no unrealized gains. The second arrives later, when a US person receives a covered gift or bequest from the covered expatriate under IRC Section 2801. That second point can land decades after the expatriation event.
What is the Section 2801 tax on covered gifts and bequests?
IRC Section 2801, enacted in 2008, taxes the US person who receives a gift or bequest from a covered expatriate. The recipient pays effectively 40% of the fair market value of the property received. There are virtually no deductions or exemptions, so the 40% applies to the full value. The gift or bequest can be direct or indirect, for example through a trust. Treasury has a proposed-regulation project underway under Section 2801.
Can someone with significant assets still owe no exit income tax?
Yes. Unrealized gains, not wealth, drive the exit income tax. Compare USC “A” with US$5,000 in total assets and USC “B” with US$15 million of cash in the bank and nothing else. Both owe the same exit income tax: US$0. Cash carries a tax basis equal to its amount, so neither has any unrealized gain to tax. And if neither can satisfy the certification requirement under Section 877(a)(2)(C), both are covered expatriates just the same.
Why would a covered expatriate with no assets ever create a future tax bill?
Because the Section 2801 tax can land long after expatriation, on assets you do not have yet. Two things change over time. You may grow or inherit assets after expatriating, while no longer a US citizen, ending up with far more than you hold today. And people in your life, family or friends, may become US residents even if none are today. Either shift can set up a future covered gift or bequest from you to a US person.
How much tax could a modest future inheritance trigger?
Take USC “A,” who renounces and, 40 years later, leaves a US$120,000 bequest to a daughter who has since moved to the US. Under Section 2801, the daughter would owe more than US$40,000 in tax on that inheritance, roughly 40%, with virtually no deductions or exemptions. That is a heavy burden on a relatively modest inheritance. It is one of several scenarios that show how covered expatriate status can matter over the long run.
How realistic is it that a future heir becomes a US person?
It is common. One family member moves to the US temporarily for work or graduate school, gets married, and decides to stay, even for a while. Often they have children, who are US citizens by birth in the US. A US person is now part of the family tree. A future gift or bequest from a covered expatriate to that person can fall under Section 2801, decades after the expatriation itself.
Read the full analysis here.
Is There a Statute of Limitations on FBAR Penalties?
FBAR Statute of Limitations: How Long the Government Has to Act Against Filers Living Abroad
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What is the FBAR, and what law requires it?
The FBAR (the Foreign Bank Account Report) comes from a different law than the federal income tax. The income tax sits in Title 26 of the U.S. Code. The FBAR comes from the Bank Secrecy Act, which is Title 31. These two laws are very different, with very different obligations and rights. One of the important differences is the time frame in which the government can assess penalties for not complying.
Who has to file an FBAR?
By its expansive terms, which some would call extraterritorial, the FBAR law applies to U.S. citizens residing outside the U.S. It also applies to most LPRs (lawful permanent residents, or green card holders) residing outside the U.S. Many of these people are unaware the rules reach them.
What is a statute of limitations for these penalties?
A statute of limitations is the time frame in which the government has to assess penalties for not complying with the law. For foreign accounts, these time periods are not the same under Title 31 (the Bank Secrecy Act) as they are under Title 26 (the income tax law). The gap between the two is what makes this area confusing.
Is there a time limit for the IRS to assess income tax if a return was never filed?
No. When a U.S. citizen or LPR residing overseas fails to file an income tax return, the time period for the IRS to make tax assessments never lapses. There is effectively no statute of limitations against the IRS in that situation. The clock to assess does not start until a return is filed.
How long does the government have to assess civil FBAR penalties?
Title 31, the Bank Secrecy Act, is different. It does have a time period that runs against the U.S. federal government, even if the FBAR was never filed. For civil assessments of penalties, that time period is 6 years.
Can someone be criminally liable for not filing an FBAR?
Yes. A U.S. citizen or LPR living overseas could become criminally liable for willfully not filing the FBAR form. Criminal liability carries different legal consequences than a civil penalty. The key word is willfully, which separates a criminal matter from a civil one.
How is the FBAR filed now?
All FBARs must now be filed electronically. The form is not filed with the IRS. It is filed with FinCEN (the Financial Crimes Enforcement Network), on Form 114, Report of Foreign Bank and Financial Accounts, through the BSA E-Filing System website. The electronic Form 114 supersedes TD F 90-22.1, the paper FBAR form used in prior years.
Can the U.S. collect FBAR penalties in the filer’s home country?
Not always. The laws of many countries outside the U.S. often conclude that enforcing these FBAR penalties against a U.S. citizen, inside that person’s home country, violates the laws of that country. Canada is one example. Calgary based tax attorney Roy Berg has written on the question of whether the IRS can collect FBAR penalties under the Canada-US Treaty.
Is there a statute of limitations for criminal FBAR charges?
Yes, there are also statutes of limitations for criminal charges the government brings for FBAR violations. The law gets much more complex here, especially when the taxpayer is residing outside the U.S. In that situation, the time period can be tolled or suspended in favor of the government, which extends the window to bring charges. Jack Townsend has written on the statutes of limitations for FBAR noncompliance related to tax noncompliance.
Read the full analysis here.
When Does the IRS Have No Time Limit to Audit or Assess Taxes?
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What is the statute of limitations on an IRS tax audit?
The statute of limitations is the time frame in which the government has to conduct an audit against a US taxpayer. Once that time frame lapses, the IRS cannot commence tax audits or assess taxes or tax penalties against a US citizen (USC) or lawful permanent resident (LPR, a green card holder) living overseas. In other words, the limitations period sets a fixed window, and after it closes the taxpayer generally has protection from new audits and assessments for that year.
In what situations is there no statute of limitations for a US citizen or green card holder abroad?
There are basically three ways a US citizen or green card holder living outside the US will have no protection of a statute of limitations against the IRS. In these scenarios the limitations period stays open, so there is no closing date on the government’s ability to audit or assess. The three basic scenarios are:
- The USC or LPR does not file a US income tax return (IRC Section 6501(c)(3)).
- There is fraud on the part of the taxpayer (IRC Sections 6501(c)(1), (c)(2)).
- The USC or LPR fails to report certain foreign transactions (IRC Section 6501(c)(8)).
What happens to the statute of limitations if you do not file a US income tax return?
If a US citizen or green card holder does not file a US income tax return, there is no statute of limitations for that year under IRC Section 6501(c)(3). Because the limitations clock generally starts when a return is filed, no return means the period never begins to run. The IRS may therefore audit or assess for that year without a fixed cutoff.
How does tax fraud affect the statute of limitations?
Where there is fraud on the part of the taxpayer, there is no statute of limitations under IRC Sections 6501(c)(1) and (c)(2). An example is a taxpayer who intentionally does not report income. In that situation the limitations period stays open, so the IRS may pursue an audit or assessment for that year without a closing date.
What happens if you fail to report certain foreign transactions?
If a US citizen or green card holder fails to report certain foreign transactions, there is no statute of limitations under IRC Section 6501(c)(8). This rule was only recently adopted as part of the “HIRE Act,” the same law that created FATCA (the Foreign Account Tax Compliance Act). The limitations period for the year can remain open until the required foreign-transaction reporting is made.
Why file a complete and accurate return even when no tax is owed?
One basic point from the law is that a US citizen or green card holder is almost always better off filing tax returns that are complete and accurate, even when no tax is owing. Filing this way helps assure a fixed time frame during which the US federal government can conduct tax audits and other related tax investigations. Without that fixed window, the limitations period may stay open. Anyone weighing their own situation may want to consult an experienced tax attorney.
Where can you read more about international tax statute of limitations issues?
For an overview of the statute of limitations periods, see the presentation “Starting the Race Against the Tax Authority in the International Tax World – Statute of Limitations & Lack of Filings” by John C. McDougal, Special Trial Attorney at the IRS, and Jon P. Schimmer and Eric D. Swenson of Procopio.
Read the full analysis here.
What Is the 5-Year Tax Compliance Requirement for Renouncing US Citizenship?
Form 8854 and the Section 877(a)(2)(C) Certification: Must Your Tax Compliance Come Before You Renounce?
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What is the certification requirement under Section 877(a)(2)(C)?
A former U.S. citizen or long-term green card holder (a lawful permanent resident, or LPR) becomes a “covered expatriate” under Section 877(a)(2)(C) if they fail to certify, under penalty of perjury, that they have met their federal tax requirements for the 5 preceding taxable years. The statute treats a person as covered if “(C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.” A “covered expatriate” is a person who triggers the U.S. exit tax rules on giving up citizenship or LPR status.
What makes someone a “covered expatriate”?
If you expatriated after June 16, 2008, the expatriation rules apply if any one of these statements is true:
- Your average annual net income tax liability for the 5 tax years ending before the date of your expatriation is more than the listed amount.
- Your net worth is $2 million or more on the date of your expatriation.
- You fail to certify on Form 8854 that you have complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation.
The third test is the certification requirement, and it is the one tied to the timing question below.
Does an IRS form or its instructions carry the “force of law”?
An IRS form and its conditions may not carry the “force of law.” Treasury and the IRS cannot create law by publishing a substantive rule in a form. The statute is what binds. This matters because a form instruction can state a condition that the statute itself does not, and anyone citing a form will want to keep that distinction in mind.
Do the Form 8854 instructions require tax compliance before the expatriation date?
The instructions read that way. The Form 8854 instructions state that the certification must reflect that you have “complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation.” Taken literally, that language points to compliance completed before the expatriation or renunciation date. The statute, Section 877(a)(2)(C), does not specify whether the certification has to be made before or after the date of loss of nationality.
Can you come into compliance after renouncing and still avoid covered expatriate status?
This is the open question the form instructions raise. If the instructions are correct, a person could not satisfy the rule by attempting to comply with all federal tax obligations after renouncing. Under that reading, coming into compliance for 5 years and then filing Form 8854, all after taking the oath of renunciation, would not let the person avoid “covered expatriate” status. The statute itself does not say the certification must come before the date of loss of nationality, so whether the instructions can impose that timing is unsettled.
Are there Treasury regulations that settle this question?
No. Treasury has issued no regulations on this point to date. There are only a few notices. One of them is IRS Notice 2009-85 on expatriation, and its own “force of law” is itself open to question. Without regulations, a form instruction is not the same as binding law.
Could the IRS still challenge someone who complies after renouncing?
Yes. Even where a form instruction may not carry the force of law, the IRS may still challenge a former U.S. citizen or LPR who does not also meet the condition set out in the IRS’s own instructions. The agency could argue that the person failed the certification requirement of Section 877(a)(2)(C) by not satisfying tax compliance before the expatriation date.
Why does this matter before taking the oath of renunciation?
The timing of tax compliance is a detail a former U.S. citizen or green card holder may want to weigh carefully before renouncing. The statute is silent on whether the certification must come before the date of loss of nationality, while the form instructions point to compliance before that date, so the literal-statute reading and the form-instruction reading can diverge. Consult an experienced attorney before rushing off to take the oath of renunciation.
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