This article is for US residents, citizens and green-card holders.
the last three years the United States Internal Revenue Service (IRS) has been
aggressively pursuing US persons (including US citizens and green-card holders)
who have failed to report foreign income on their US income-tax returns and/or
failed to report foreign bank and investment accounts on a Foreign Bank Account
Report (FBAR). On December 19, 2008, IRS associate chief counsel (international)
Steve Muser said his top priority would be “compliance, compliance,
Previous US amnesties
As a result, in 2009 and again in 2011
the IRS implemented two amnesty programs that encourage US persons to come
forward and declare their undisclosed foreign income and assets. More than
30,000 people have come forward to voluntarily comply since 2009, at least 30
have been criminally indicted and the IRS has netted a total of $4.4 billion in
unpaid taxes, interest and penalties.
However, the IRS knows there are
still many out there who have not yet come forward. The State Department
estimates that more than 6 million citizens live overseas, excluding those in
the military, yet the IRS receives only 1.6 million tax returns each year with
foreign addresses. And just over 500,000 FBARs were filed in 2009.
January 9 the IRS announced a third amnesty, formally known as the Offshore
Voluntary Disclosure Program. It is substantially the same as the 2011 amnesty
(aka 2011 OVDI), with some exceptions:
(1) There is no deadline to apply to the
program, although the IRS reserves the right to change the terms at any time
going forward. For example, they state they have the right to increase
(2) The top penalty is 27.5 percent (increased from 25%)
of the highest aggregate balance in foreign bank accounts/entities or value of
foreign assets during the eight full tax years prior to disclosure. If you
disclose in 2012, you must include 2004- 2011.
(3) Some people will be
eligible for a lower penalty of either 12.5% or 5%, which is the same as the
One of the problems with the IRS’s attitude in all
of this is that they are treating all US persons as if they all exist in one
box; they do not distinguish between John Smith, in Baltimore, Maryland, who is
hiding his illgotten gains in a Swiss bank account, from Moishe Peloni, in
Beersheba, who has an account with Bank Hapoalim in Beersheba because that’s
where he lives.
Last June, the IRS, for the first time, officially
recognized that a US person living in a foreign country should be treated
slightly differently than a US person residing in the United States. As part of
the 2011 amnesty, if the US person living in a foreign country met certain very
restricted conditions, his penalty was reduced to 5% of liquid foreign assets as
opposed to 25% of all foreign assets. But still a penalty was imposed! For many
dual nationals in Israel that meant 5% (or 25%) of their pensions and Keren
Hishtalmut.New fact sheet
Last December 13, the IRS issued a fact sheet
and took one step closer to recognizing that a US person or dual national living
in a foreign country should have a different status than a US person residing in
the US. The fact sheet sets out the facts and circumstances under which a US
citizen or dual national residing outside the US could report previously
undisclosed foreign income and assets with reduced or no penalties.
tax is due, the fact sheet specifies that no penalties will be imposed for
coming forward now and filing the tax returns. Likewise, if no tax is due, or a
de minimis amount is due, the IRS most likely will not impose any penalties for
filing the FBARs if reasonable cause exists for the noncompliance.
it states that no single factor is determinative, it gives two examples of
reasonable cause that they apparently will accept:
(1) The taxpayer relied upon
the advice of a professional tax adviser “who was informed of the existence of
the foreign financial accounts, that the unreported account was established for
a legitimate purpose, and there were no indications of efforts taken to
intentionally conceal the reporting of income or assets.”
taxpayer filed delinquent tax returns and FBARs after learning of his obligation
from “recent press,” and the taxpayer “had a legitimate purpose for maintaining
the foreign accounts, there were no indications of efforts taken to
intentionally conceal the reporting of income and assets, and no tax was
due.”What if you owe US tax?
The fact sheet does not really address this
issue. Less than a month later, the third amnesty comes along. But the
potentially onerous penalties are still present.
For many, the third
amnesty may still be the best way to resolve delinquent tax issues. If accepted,
there is no criminal prosecution and you know going into the program what it
will cost you. If you do not use the program, you have the uncertainty of the
final amounts due.
Do not forget to factor in foreign tax credits and the
Section 911 exclusion (limited exemption) where applicable. Also, you always
have the option to “opt out” of the program if you do not like the final IRS
agreement. However, you are exposed at this point.
Hence, the expatriate
living in Israel (or other countries) is left with a quandary. However,
in the third amnesty announcement, the IRS declares that it will continue to
develop procedures by which dual citizens “may come into compliance with US tax
law.” Let’s hope that the IRS will indeed make it more palatable for US citizens
living abroad to come in from the cold.
It also states that the “IRS is
committed to educating all taxpayers so that they understand their US tax
responsibility.” If the IRS embarks on a worldwide publicity campaign, it will
be impossible for most US taxpayers to claim ignorance.
If you have not
been filing US tax returns, or have not reported foreign-source income and
assets, doing nothing may no longer be an option.More US reporting
Starting with the 2011 US income-tax return, you must now attach a
new Form 8938 to disclose all foreign financial assets (FFA). For those living
in a foreign country, this form is required if your FFA exceeds: (a) if not
filing a joint return, $200,000 on the last day of the year, or $300,000 at any
time during the year; (b) if filing a joint return, $400,000 on the last day of
the year, or $600,000 at any time during the year. Failure to file a complete
and correct Form 8938 by the due date of the return can be subject to a penalty
Also starting with the 2011 US tax return, there is now a
separate line in the address section to report the foreign country in which you
live. Similarly, you must now answer yes to the question on Schedule B (Interest
and Dividend Income) that you have a financial interest or signature authority
in a foreign account even if the aggregate balance is less than
Starting in 2013, under FATCA rules, every bank in the world
will have to have a written agreement with the IRS to furnish information about
accounts held by US persons. If the bank does not comply, it will suffer certain
monetary penalties and possible criminal prosecution. The information will
include your name, address, US Social Security number and all the transactions
in the account.What’s best?
So it seems the US reporting problem simply
will not go away. It may be in your best interest to come forward before the IRS
finds you, in which case the penalties most likely will be more
severe.And in Israel?
Israel and the US have unrelated tax systems, and
never the twain shall meet between them. This past November, the Israel Tax
Authority (ITA) also offered a tax amnesty. Until this June 30, you can file
Israeli tax returns to report previously undisclosed foreign-source income.
Unlike the IRS, the ITA should not charge any interest or penalties and possibly
could reduce indexation charges. The ITA will also forgo criminal prosecution.
All this assumes you meet certain criteria.To sum up
residents (including US dual nationals residing in Israel) who have not reported
foreign-source income and assets, there is a short window to come clean in both
countries.As always, consult experienced tax advisers in each country at
an early stage in specific email@example.com
Shrensky is a US and Israeli CPA and managing partner in Don Shrensky &
Co. CPAs. Leon Harris is a UK and Israeli CPA and international tax
specialist at Harris Consulting & Tax Ltd.