What Is the Difference Between Willful and Non-Willful FBAR Violations?
Table of contents
Read the full analysis here.
What do “willful” and “non-willful” mean for US citizens and green-card holders living abroad who have not filed?
“Willful” and “non-willful” describe how a failure to file is characterized. For any US citizen (USC) or lawful permanent resident (LPR, a green-card holder) living outside the US who has not been filing US income tax returns or FBARs (the Foreign Bank Account Report), the willfulness question is one of the most important to understand. The IRS “streamlined” procedure requires a taxpayer to certify that the conduct was non-willful. The distinction shapes the options a person has for correcting past filings.
Why does the willful or non-willful question matter for a US citizen or green-card holder overseas?
The willful or non-willful question matters because it shapes what steps a US citizen or green-card holder living abroad needs to take about filing US income tax returns. The answer affects how a person who has not been filing may approach cleaning up past returns and FBAR filings.
Can a green-card holder living in a tax-treaty country clean up past US tax filings?
A green-card holder who lives predominantly in a country that has a US income tax treaty may be in the best position to clean up past US tax filings and return positions. The US has 68 income tax treaties. Under the “tie-breaker provisions” of such a treaty, typically Article 4, the person’s facts may allow them to file as a non-resident, and those filings may apply to several prior years.
When is a green-card holder no longer treated as a lawful permanent resident for US tax purposes?
A green-card holder is no longer treated as a lawful permanent resident for US federal tax purposes under IRC Section 7701(b)(6) when three tests 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 the treaty; and
- the individual notifies the Secretary of the commencement of such treatment.
When a green-card holder notifies the IRS that he or she is not a US resident under an applicable income tax treaty and files the treaty position accordingly, the issue of “expatriation” becomes front and center.
Can a green card be given up for tax purposes just by moving outside the US?
In some cases, yes. Since the 2008 tax law changes, lawful permanent resident status can be abandoned for tax purposes by merely leaving and moving outside the US.
Does giving up long-term green-card status trigger the US exit tax?
Giving up green-card status can trigger the US “exit tax” for a green-card holder treated as a “long-term resident.” A green-card holder who has held that status for 8 years or more is generally treated as a long-term resident and may be subject to the exit tax of IRC Sections 877 and 877A. A separate tax may also apply to future US persons who receive gifts or inheritances from such a former green-card holder under Section 2801.
What does the IRS streamlined procedure require taxpayers to certify?
The IRS “streamlined” procedure, announced on June 18, 2014, has specific requirements that obligate the taxpayer to certify “non-willful” behavior. That certification is made under penalty of perjury. Where a green-card holder’s past failure to file US income tax returns was not non-willful, difficult legal questions arise about the consequences.
Read the full analysis here.
What Happens to Your Social Security Number When You Renounce US Citizenship?
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Read the full analysis here.
What rules govern Social Security numbers?
The Social Security Act regulations set specific rules for Social Security numbers (SSNs) at § 422.103, titled “Social security numbers.” These rules cover how a person applies for an SSN, how to obtain a replacement Social Security card, how SSNs are assigned, and how the Department of Homeland Security (DHS) can have an agreement with the Social Security Administration (SSA) on issuing SSNs to people who have immigrated to the United States.
Who is eligible for a Social Security number?
Form SS-5 explains the general requirements for an SSN as set forth in the law. To qualify for an SSN and a card, an individual must be one of the following:
- a U.S. citizen,
- a person with lawful, work-authorized immigration status, or
- a person with a valid non-work reason for requesting an SSN and a card.
How do you apply for a Social Security number?
Applications for an SSN are completed on Form SS-5, which is located on the SSA’s website. Form SS-5 sets out the general requirements for an SSN as established in the law, including that the applicant be a U.S. citizen, have lawful work-authorized immigration status, or have a valid non-work reason for requesting a number and card.
How do immigrants get a Social Security number through the immigration process?
Under § 422.103(b)(3), the “Immigration form” rule, SSA may enter into an agreement with the Department of State (DOS) and the Department of Homeland Security (DHS) to collect enumeration data as part of the immigration process. Where such an agreement is in effect, an alien need not complete a Form SS-5 with SSA. Instead, the person may request, through DOS or DHS as part of the immigration process, that SSA assign a Social Security number and issue a card. These requests are made on forms provided by DOS and DHS.
How many replacement Social Security cards can a person get?
The regulations limit how many replacement Social Security cards a person may receive. An individual may obtain a maximum of 10 replacement cards over a lifetime.
Can you cancel or expunge your Social Security number after losing US citizenship or green card status?
There appears to be no statutory or regulatory rule in the law that allows an individual to “expunge” or otherwise terminate a Social Security number once it has been obtained. This appears to remain the case even after a person loses U.S. citizen (USC) or lawful permanent resident (LPR, or green card) status. The assigned number generally stays in place. Anyone weighing the tax or immigration consequences of giving up citizenship or a green card may want to consult an experienced attorney.
Read the full analysis here.
What Is a FATCA Intergovernmental Agreement and Is It Really Two-Way?
FATCA IGAs and the One-Way Reporting Gap: What US Persons and Foreign Residents Actually Face
Table of contents
Read the full analysis here.
What is FATCA, and how many countries have FATCA agreements with the United States?
FATCA (the Foreign Account Tax Compliance Act) is the US law behind the intergovernmental agreements (IGAs) that the US Treasury negotiated with some 113 countries. Treasury publishes the full country list on its website. Not all of these countries have actually signed. Many have what Treasury calls an “agreement in substance.” The IGAs require foreign financial institutions (FFIs, meaning non-US financial institutions) to identify “U.S. Persons” and “Substantial U.S. Owners,” and to report what the IGAs call “U.S. Reportable Accounts.” Treasury describes the agreements as “bilateral.” One published example, the FATCA IGA with Colombia, is largely identical in form to almost every other IGA.
How do FATCA IGAs affect US citizens and green-card holders living outside the United States?
They affect US citizens (USCs) and lawful permanent residents (LPRs, green-card holders) in many ways. Foreign financial institutions around the world now collect extensive information to identify account holders who are “U.S. Persons” or “Specified U.S. Persons,” the term the IGAs use for accounts that must be reported. If you received questions from a foreign bank asking whether you are a US person, FATCA is why. The reporting reaches beyond direct accounts. It also reaches entities that a US person controls.
Why are some foreign banks refusing or closing accounts for US citizens and LPRs?
Many FFIs have adopted a policy to no longer accept or retain US accounts. The cost of complying with FATCA for US citizens and lawful permanent residents is high. Many FFIs also want to avoid the risk of being penalized heavily by the US federal government, including being charged with aiding and abetting US taxpayers to evade their US tax obligations. Jack Townsend’s website, Federal Tax Crimes, reviews these cases in detail, with particular focus on Swiss banks and the US DOJ Program for Swiss Banks.
What is the difference between a “U.S. Reportable Account” and a “Country X Reportable Account”?
This difference is the core asymmetry of FATCA. A “U.S. Reportable Account” is defined extraordinarily broadly. A “Country X Reportable Account,” for example a Colombian Reportable Account, is defined narrowly. That gap is why the IGAs are not truly bilateral: US banks do not have to provide the same detailed information on their non-US clients that FFIs must provide on US accounts. A plain reading of the IGAs gets you to that conclusion.
What income must a US bank report on a foreign resident’s account?
Only a limited slice. A Colombian Reportable Account obligates US banks to send information on US source income of individual residents under chapter 3, plus certain accounts of Colombian entities. All non-US source income of a Colombia resident individual is not subject to reporting by the US financial institution. A Colombian resident could hold a US$150M portfolio of non-US mutual funds and ADRs (American Depositary Receipts) traded on the NYSE, with none of that income reported to the Colombian government. Stock sales of US corporations such as Apple, Ford, or Microsoft are not treated as “US source income” under chapter 3 either.
Can a foreign resident use an offshore company to avoid US bank reporting?
Yes, under the IGAs as written. If a Colombian resident holds investments through an offshore corporation, for example a BVI (British Virgin Islands) company, no reporting is required of the US financial institution. That holds even if the entire US$150M portfolio is invested in US stocks, US treasuries, and other American financial investments. Individuals resident in countries such as the UK, France, Mexico, China, the Netherlands, Spain, Colombia, Brazil, Belgium, Guatemala, and Luxembourg can generally hold US investment assets through opaque legal structures and hide behind the entity. A US financial institution has no duty to identify or disclose the beneficial owners to those residents’ tax authorities.
What must a foreign bank report on an account controlled by a US person?
Far more. A “U.S. Reportable Account” includes a US Person who is a “Controlling Person” of a “Non-U.S. Entity.” Take the reverse example: a Colombian bank must identify all of its clients holding non-US entities, an expensive due diligence process, and then determine whether each entity such as a BVI company has a “Specified U.S. Person” behind it. It does not matter whether the income comes from Colombian sources or non-Colombian sources. Income is income, and the FFI must report it. Banks in at least 113 countries must drill down and collect detailed information on the beneficial owners of basically all companies, trusts, and other legal entities, to find “U.S. persons” and “substantial U.S. owners” as defined in the FATCA regulations.
Can US taxpayers hide assets behind offshore entities under FATCA?
Generally no. FFIs must provide extensive information on all income in a “U.S. Reportable Account” to the IRS, either directly or indirectly through their own governments. US taxpayers cannot hide behind offshore opaque legal entities. It is generally illegal for US citizens to form and hold assets in a foreign corporation without reporting that corporation’s assets, activities, and earnings. Such a foreign corporation would generally be a CFC (controlled foreign corporation) or possibly a PFIC (passive foreign investment company).
Read the full analysis here.
Who Was FATCA Actually Aimed At? The Law’s Origins and Unintended Consequences
Read the full analysis here.
What is FATCA, and when did it take effect?
FATCA (the Foreign Account Tax Compliance Act) is a US law that went into effect on 1 January 2014. Since then, there have been an increasing number of consequences for United States citizens (USCs) and lawful permanent residents (LPRs, or green-card holders) who live overseas.
What was FATCA designed to do?
FATCA was built to bring transparency to the worldwide assets of US citizens and green-card holders. Its intended consequences include:
- Identifying non-US financial, investment, and company assets held by USCs and LPRs.
- Identifying the foreign financial institution (FFI) where those assets are located.
- Identifying non-financial foreign entities (NFFE) owned by a USC or LPR.
- Generally bringing transparency to the assets, accounts, and information about the worldwide assets of USCs and LPRs.
Much of this information gets collected through IRS forms, including Forms W-8BEN, W-8BEN-E, and W-9 used by USCs and LPRs overseas. To carry this out around the world, the US Treasury Department negotiated FATCA Intergovernmental Agreements (IGAs) with various countries.
Who was FATCA originally meant to target?
The group FATCA originally targeted was US resident individuals who were evading taxes through foreign financial institutions. The focus was on US resident taxpayers, even though the US imposes income tax on the worldwide income of US citizens living anywhere in the world. This understanding comes from extensive conversations with ex-government officials and some government officials who were involved in the original policy discussions.
What is the biggest unintended consequence of FATCA?
One of the most significant unintended consequences is that the US federal government, meaning the IRS, the Treasury Department, and Congress, never initially even contemplated USCs and LPRs living overseas. An unintended consequence is one that was never contemplated by Congress or the President when the laws were passed, nor intended by the Treasury Department as the IGAs were negotiated. The heavy compliance burden now felt by Americans and green-card holders abroad was a consequence of this kind, not part of the original plan.
Why has it been hard for the IRS to collect taxes from Americans living abroad?
For many years, the US federal government has known it can be nearly impossible to collect a tax liability against US citizens who live and hold their assets outside the United States. The Treasury Department made this point back in 1998, noting that because the United States asserts taxing jurisdiction over people with little or no connection to the country other than citizenship or status as a lawful permanent resident, overseas US taxpayers are in many cases difficult to trace or contact. Treasury added that even when valid tax assessments can be made against overseas taxpayers, the IRS has limited enforcement recourse if the taxpayer’s assets are physically located outside the United States. This appears on pages 13 to 15 of that 1998 Treasury report.
Did the early offshore disclosure programs account for people living overseas?
The original offshore voluntary disclosure initiative in 2009 never even contemplated any particular treatment for USCs or LPRs residing overseas. At that time, the US citizen or green-card holder living abroad was not on the IRS radar. The programs shifted over time:
- In 2011, a new category imposed a 5% penalty for persons residing overseas who had only US$10,000 of US-source income.
- As the IRS realized that millions of USCs and LPRs live somewhere other than the US, the 2014 OVDP was modified again to provide a 0% penalty in certain circumstances for these individuals.
FATCA itself was originally passed in 2010, and at that point USCs and LPRs living overseas were not the focus and barely a thought.
Are Americans living overseas now a focus of the government?
Yes. Even the Senate has started to focus on US citizens living overseas. The Senate Permanent Subcommittee on Investigations focused extensively on Swiss accounts opened by US citizens living outside the United States. Its findings appear in the report titled Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, dated February 26, 2014.
Read the full analysis here.
Read the full analysis here.
What Tax Forms Do US Citizens and Green Card Holders Living Abroad Need?
Living outside the United States does not eliminate your US tax obligations. US citizens and green card holders abroad must file a US tax return every year and may also need to file additional reports on foreign assets and accounts. Here is an overview of the key forms, what they cover, and how they interact.
Table of contents:
Foreign Earned Income Exclusion (FEIE)
Foreign Tax Credits (FTC)
Information Reporting and FBAR
Tax Preparation Software
Foreign Earned Income Exclusion (FEIE)
Is my foreign income automatically exempt from US reporting?
No. A common misconception is that foreign income is exempt because it can be excluded. Foreign earned income is not exempt. You must report it on a US tax return, and you must be a qualifying individual to elect the exclusion.
What types of income qualify for the exclusion on Form 2555?
The exclusion is available only for “earned” income. It cannot be used for passive investment income such as dividends, interest, or capital gains.
Foreign Tax Credits (FTC)
How does a Foreign Tax Credit work?
A Foreign Tax Credit provides a dollar-for-dollar reduction, subject to limitations, of your US federal tax burden for income taxes you paid to another country on income sourced there. It is claimed on Form 1116.
Can I claim both the FEIE and the Foreign Tax Credit?
No. Once you choose to exclude foreign earned income or housing costs, you cannot take a foreign tax credit on that same income. If you do take the credit, your previous choice to exclude that income may be treated as revoked.
Are there different forms for lawful permanent residents (LPRs)?
US citizens and LPRs generally use Form 1040. However, LPRs residing in a country with a US income tax treaty may be eligible to file Form 1040NR as a non-resident.
What is Form 8938?
Form 8938 (Statement of Specified Foreign Financial Assets) is used to report specified foreign financial assets. It often overlaps with FBAR reporting and must be attached to your annual income tax return when filed with the IRS.
Who must file an FBAR (Form 114)?
US citizens and LPRs with a financial interest in or signature authority over foreign accounts must file a Foreign Bank Account Report (FBAR). The definitions of “ownership interest” and “signature authority” are interpreted very broadly under the regulations.
Where is the FBAR filed?
Unlike other tax forms, the FBAR is not filed with the IRS. You must file it electronically with FinCEN (the Financial Crimes Enforcement Network) through the BSA E-Filing System on Form 114.
What are the penalties for FBAR non-compliance?
The statutory penalty for failing to file, or filing late, is $10,000 per failure. If the failure to file was intentional, the penalty can increase to 50% of the account balances.
There are important unintended tax consequences that can befall individuals who have a green card depending upon their factual circumstances: 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).
Tax Preparation Software
Can I use standard tax software for these international forms?
Often, no. Most tax preparation software does not support Form 8938 or other forms related to non-US assets. These forms frequently require manual completion using an Adobe Acrobat version of the form.
Read the full analysis here.
Why Is My Foreign Bank Asking Me for a US Tax ID Number?
If you are a US citizen or green card holder living abroad, your local bank may have asked you to provide a US taxpayer identification number before opening an account. This is a consequence of FATCA, a US law that requires foreign banks to identify their American clients. Here is what is happening.
Table of contents:
What is FATCA and why does it affect my foreign bank?
Why does my foreign bank need my US tax ID number?
What if I have never had a Social Security Number?
What is FATCA and why does it affect my foreign bank?
FATCA, the Foreign Account Tax Compliance Act, took effect in 2014. It requires foreign financial institutions worldwide to identify their US account holders. This obligation extends to financial institutions worldwide.
A “US account” includes an account held by a US citizen who has lived all or almost all of their life outside the United States. The US Treasury has summarized FATCA’s purpose as obtaining information on accounts held by US taxpayers in other countries, as well as accounts held by certain foreign entities with substantial US owners, needed to detect and deter offshore tax evasion.
To enforce this, US financial institutions are required to withhold a portion of certain payments made to foreign financial institutions that do not agree to identify and report information on US account holders. This withholding regime acts as a backstop to FATCA’s main focus. The details and complexity of FATCA are significant, involving hundreds of pages of regulations.
Why does my foreign bank need my US tax ID number?
When you open a new account, your foreign bank must determine whether you are a US person. If you are a US citizen or lawful permanent resident (green card holder), it must collect your US taxpayer identification number (TIN). Under US tax law, a US citizen has no choice but to obtain a Social Security Number (SSN) as their TIN. Your bank will ask you to provide it, typically through IRS Form W-9 or a substitute form provided by the bank.
What if I have never had a Social Security Number?
Here is the catch-22. A US citizen who has spent virtually all of their life outside the United States will typically have no SSN. This includes people who were born in the US but raised abroad, and those who acquired citizenship through a US citizen parent, known as derivative citizenship. The bank asks for a TIN, but you do not have one to give.
The same problem arises for lawful permanent residents (green card holders) who have lived outside the United States for most of their lives. An LPR who never worked or filed taxes in the US may have no SSN or ITIN on record, yet their foreign bank now demands one under FATCA. The process of obtaining an SSN or ITIN as someone living outside the United States is particularly complex and will be addressed in a separate post.
This post provides general information only and is not legal advice. Consult an experienced attorney for guidance specific to your situation.
Read the full analysis here.
Can a US Citizen Sign a W-8 Form Instead of a W-9?
When your foreign bank asks you to complete a W-9 form as a US person, you may wonder whether you can sign a W-8 form instead to avoid FATCA reporting. The short answer is no. For US citizens, signing a W-8 is not a legal alternative. Here is why.
Table of contents:
What forms do foreign banks collect from US persons?
Can a US citizen sign a W-8 form?
What about derivative citizenship?
What is the difference between physical residency and tax residency?
What are the legal consequences of signing the wrong form?
Foreign financial institutions worldwide are required under FATCA to collect an IRS Form W-9, or a substitute W-9 form, from their US account holders. These forms may be provided in the local language of the country where the bank operates. US citizens are US persons, and most LPRs are also US persons under this definition. The goal is to identify “US persons” under US federal tax law.
Can a US citizen sign a W-8 form?
No. Under US tax law (26 USC § 6109), the only taxpayer identification number an individual US citizen may use is their Social Security Number. A US citizen, even one who has never lived a day in the United States, cannot legally sign an IRS Form W-8 certifying they are not a US person. Doing so would be signing a false document.
What about derivative citizenship?
Some people are US citizens without realizing it, through a process called derivative citizenship. A person born outside the United States to a parent who was a US citizen may have automatically acquired US citizenship at birth. The US Citizenship and Immigration Services (USCIS) provides a Nationality Chart 1 for children born outside the United States to help determine whether citizenship was acquired at birth through a US citizen parent. If you have derivative US citizenship, you are a US person and you cannot sign a W-8.
What is the difference between physical residency and tax residency?
There are two different concepts of residency. Physical residence refers to where a person actually lives. Tax residence, for US federal tax purposes, is determined by citizenship or LPR status, not by where you live. A US citizen who has not lived in the United States for many years is nevertheless treated as a US income tax resident, meaning a “US person,” for FATCA and tax purposes.
What are the legal consequences of signing the wrong form?
Any US individual income tax resident who intentionally signs a false IRS Form W-8 is filing a false document, which falls under the purview of IRC Section 7206(1), the federal perjury statute.
This post provides general information only and is not legal advice. Consult an experienced attorney for guidance specific to your situation.
Read the full analysis here.
Can You Lose Your Green Card Just by Living Outside the United States?
Many green card holders who move abroad assume their permanent resident status is safe as long as they return to the United States occasionally. Under US immigration law, that assumption can be wrong. A green card can be abandoned automatically, without any formal filing, simply by how long you spend outside the United States.
Table of contents:
How can a green card be abandoned?
What triggers an automatic abandonment finding?
What factors does DHS consider?
How does filing a tax return as a non-resident affect your status?
What can you do if you expect a long absence?
How can a green card be abandoned?
A lawful permanent resident (LPR) can lose permanent resident status through removal (deportation) ordered by an immigration court, or through abandonment. Abandonment can happen formally, by filing Form I-407 (Abandonment of Lawful Permanent Resident Status), or automatically, by operation of law, when an LPR takes an action that constitutes abandonment under immigration law, such as departing the United States for more than a temporary visit abroad. There are important unintended tax consequences that can befall individuals here: 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 triggers an automatic abandonment finding?
The Department of Homeland Security (DHS) will make an abandonment finding if an LPR takes a single trip outside the United States lasting more than one year. After a trip of more than one year, the LPR can only challenge the finding in removal proceedings. For a single trip lasting between 6 months and one year, DHS presumes the LPR intended to abandon their permanent resident status, but the LPR may rebut that presumption. Even for shorter trips, DHS may find abandonment if the LPR has spent a significant amount of time outside the United States on multiple trips.
What factors does DHS consider?
DHS and the immigration courts look at: the purpose and duration of the trip abroad; whether there was a specific event after which the LPR planned to return; and the LPR’s family ties, employment, property holdings, and business affiliations in the United States versus the foreign country.
How does filing a tax return as a non-resident affect your status?
Filing a US income tax return as a non-resident alien raises a rebuttable presumption of abandonment of LPR status for immigration purposes.
What can you do if you expect a long absence?
If an LPR knows they will need to spend significant time outside the United States, they should apply for a reentry permit before departing. A reentry permit alone does not guarantee readmission following a long absence, but it is evidence of the intent to return to the United States and maintain permanent resident status.
This post provides general information only and is not legal advice. Consult an experienced attorney for guidance specific to your situation.
Read the full analysis here.
Why You Need to Plan Before Renouncing US Citizenship
Giving up U.S. citizenship or a green card can trigger an immediate income tax bill, and the IRS may be able to collect it indefinitely, no matter where you live. The rules can also reach your friends and family. This post explains why tax planning generally comes before the paperwork, who the expatriation rules can affect, what the U.S. Department of State forms are, and how hard the tax may be to collect once you live abroad. Consulting an experienced attorney before taking any of these steps is essential.
Table of contents:
Read the full analysis here.
Why does tax planning usually come before giving up U.S. citizenship or a green card?
U.S. international tax law is complex. Without planning, people can create very adverse tax consequences for themselves and for their friends and family, often without understanding the full implications of the law. This is especially true for tax expatriation, which is when a U.S. citizen (USC) renounces citizenship or a long-term lawful permanent resident (LPR), meaning a green card holder, abandons that status. Several features of the law make planning ahead important.
What is the general income tax rule when someone expatriates?
The general rule is that an immediate income tax is payable under the “mark to market” taxation rules on unrealized gains. Mark to market means that unrealized gains, the increase in value of assets that have not actually been sold, are treated as if the assets were sold and are taxed right away. This can produce an income tax bill at the time of expatriation, even though nothing has actually been sold.
Can the IRS collect the expatriation tax from someone living outside the United States?
Yes. Once a tax is recognized under U.S. tax law, the only way to discharge the liability with the U.S. federal government is to pay the tax owing. The IRS generally can collect an income tax owing against a taxpayer who lives outside the U.S. indefinitely. The normal 10 year collection statute does not apply while the individual is outside the United States for a continuous period of at least six months, under IRC Section 6503(c). In effect, the IRS can “forever” pursue collection of the expatriation tax against U.S. citizens and lawful permanent residents living outside the U.S.
Can someone become a covered expatriate even with no assets?
Yes. It is easy to fall into the general rule of expatriation, even for a taxpayer who would not otherwise be subject to income taxation. A person who falls into these rules is called a “covered expatriate.” Because covered expatriate status can attach even to someone with no assets, it is sometimes described as a “Forever Taint.”
Can your friends and family be taxed because of your expatriation?
Yes. The friends and family of a covered expatriate, meaning a former U.S. citizen or long-term lawful permanent resident who fell into these rules, can be subject to U.S. taxation during their lifetimes, even if they also live outside the United States. This consequence comes from Section 2801, sometimes called the “Hidden Tax” of expatriation and another part of its “Forever Taint.”
Renouncing U.S. citizenship involves going to the U.S. Department of State and taking the oath of renunciation. Two forms are completed and filed at that time:
- Form DS-4080, Oath of Renunciation of the Nationality of the United States.
- Form DS-4081, Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of U.S. Citizenship.
The reason planning generally comes first is that these are the steps that formally complete the renunciation, after the tax consequences are already in motion.
If you live abroad with no U.S. assets, can the IRS still collect?
It may be difficult. If the individual lives outside the U.S., does not travel to and from the U.S., and has no assets in the U.S., it may be practically very difficult for the IRS to collect on the tax judgment owing. Even so, there are legal means and steps the IRS can take in an attempt to collect U.S. taxes on assets held overseas.
Why is planning important before renouncing citizenship or abandoning a green card?
Ideally, a former U.S. citizen or long-term lawful permanent resident will want to avoid these potential tax and collection issues by engaging in thoughtful and strategic planning before renouncing U.S. citizenship or abandoning lawful permanent residency. Because expatriation can trigger an immediate tax, long-term collection exposure, and tax consequences for family members, the planning generally comes before the renunciation paperwork. Consulting an experienced attorney before taking any of these steps is essential.
Read the full analysis here.
Understanding Your FBAR Obligations: A Guide for U.S. Citizens and Residents Abroad
If you are a U.S. citizen or a Green Card holder living overseas, you may have heard of the “FBAR.” While it sounds like a complex tax term, it is actually a financial reporting requirement that follows you no matter where you live in the world.
Here is a breakdown of what you need to know to stay compliant, explained in plain English but with a focus on the legal details.
Table of contents:
What is the FBAR?
Who has to file?
What accounts are covered?
Is the FBAR the same as Form 8938?
The reality of FBAR penalties
How to file
What is the FBAR?
The FBAR stands for the Report of Foreign Bank and Financial Accounts. Its official name is FinCEN Form 114.
Legally, this is not an income tax requirement. It is a mandatory report required under Title 31, Section 5314 of the U.S. Code. Because it falls under “Money and Finance” laws rather than the Internal Revenue Code, you do not file it with the IRS. Instead, you file it with FinCEN (the Financial Crimes Enforcement Network), a separate branch of the Treasury Department.
Who has to file?
The requirement applies to all U.S. Citizens (USCs) and Lawful Permanent Residents (LPRs), regardless of their physical location.
Global Reach: If you are a U.S. citizen living in France, you are required to report your French bank accounts, as well as any other accounts you might hold in places like London or Geneva.
Green Card Holders: Similarly, a Green Card holder living in Sao Paulo, Brazil, must report their Brazilian accounts and any accounts held in other countries, such as Uruguay.
Defining “Resident”: Interestingly, the law for FBARs uses the tax code’s definition (Internal Revenue Code Section 7701(b)) to determine who counts as a “resident,” even though the FBAR itself is not a tax form.
Note: While many resources mention a $10,000 threshold for filing, this specific dollar amount is not mentioned in the legal excerpts provided here; you should verify current filing thresholds independently.
What accounts are covered?
The law is broad and covers bank and financial accounts located outside of the United States. This includes accounts in your country of residence and any other foreign country. Currently, all FBARs must be submitted using the electronic Form 114, which replaced the old paper form known as TD F 90-22.1.
No, though they are often confused because they involve duplicate reporting.
FBAR (Form 114): A financial report filed with FinCEN under Title 31.
Form 8938: A tax information return filed directly with your IRS tax return under Title 26.
A major legal distinction lies in the statute of limitations. The FBAR has a time limit after which the government can no longer assess penalties, even if you never filed the form. In contrast, if you fail to file Form 8938, there is no time limit for the IRS to come back and assess income taxes and penalties for that year.
The reality of FBAR penalties
The penalties for failing to file an FBAR are often discussed as being severe, but the law provides some unique protections.
Penalties are Elective: The law states the Secretary of the Treasury “may” (not “shall”) impose a penalty. This means the government has the discretion to decide whether or not to penalize a violation; it is not mandatory.
Limited Collection Powers: Unlike a standard tax debt, the government cannot simply place a tax lien or levy on your property to collect an FBAR penalty. Instead, the government typically must sue you in a judicial court action to enforce the penalty.
Expiration Dates: Because there is a statute of limitations, the government’s window to act is limited. For example, if a U.S. citizen missed a filing for the year 2006, the time for the government to assess a penalty has already lapsed.
How to file
Gone are the days of mailing paper forms. All FBARs must now be filed electronically through the BSA E-Filing System website.
Staying compliant is obligatory, but understanding these nuances can help you navigate the process with more confidence. If you have accounts abroad, ensuring your electronic Form 114 is submitted correctly is the best way to avoid the complications of a potential government investigation.
This post provides general information only and is not legal advice. Consult an experienced attorney for guidance specific to your situation.
Read the full analysis here.
