United States: Are You A U.S. Citizen Still Sitting On The Fence?

If you are a U.S. citizen living outside of the United States and you have not been filing your U.S. personal income tax and financial reporting forms, it is time to consider your options. Doing nothing in such circumstances will risk serious consequences. However, on February 5, 2015, the Obama administration set out a proposal to allow certain dual citizens to renounce their U.S. citizenship without being required to comply with the many onerous personal income tax filing requirements. The proposal is restricted to a small group of individuals. In order to qualify, you must be willing to renounce your U.S. citizenship, a difficult requirement in this global economy. Further, there is not yet any guarantee that the proposal will be passed into law.

Several conditions will apply. First, you must be a dual citizen who became a citizen of the United States and another country at birth. This condition limits the scope of the proposed relief significantly. Second, you must have remained a citizen of that other country and you must not have resided in the United States since turning 18 and a half years of age. Third, you must never have held a U.S. passport unless it was for the sole purpose of departing from the United States. If you have obtained a U.S. passport for any other purpose, you will not qualify for the proposed exemption.

The proposal is designed to accommodate those individuals who never had any significant ties to the U.S. during their adult life and are often dubbed "accidental U.S. citizens." For everyone else, the message is clear: even if the U.S. government does proceed in making any concessions toward taxing its citizens residing outside the U.S., those concessions will apply only for a very limited group of individuals. If you fall into this small category, the proposal – if enacted into law – will eliminate the need to file five years of tax returns before you renounce your citizenship, and will exempt you from the "departure tax," which includes a capital gains tax on the deemed disposition of your worldwide assets.

But a key question remains: how long are you willing to wait to see if this proposal passes? Under the proposal, if you already know you are a U.S. citizen, you must relinquish your U.S. citizenship within two years from January 1, 2016. If the proposal is not passed into law, you risk being left without an option to come forward voluntarily if the IRS Streamlined Procedures (described below) are eliminated. The IRS has been known to change its policies on short notice. Further, any delay increases the likelihood of the IRS catching up with you.

So what does this mean for those individuals who have not taken any steps to become compliant with their U.S. tax filings? The U.S. government is unlikely to give up on enforcing the income tax filing obligations of U.S. citizens. It has, however, made it easier for U.S. citizens to come forward and become compliant now. The Streamlined Program allows U.S. citizens to get "caught up" with delinquent U.S. income tax returns and related information returns by allowing taxpayers to file the last three years of U.S. tax returns and six years of foreign bank reporting forms. The initial cost of filing these forms can be daunting, but penalties for not filing can be even more severe.

Further, the U.S. has introduced FATCA (Foreign Account Tax Compliance Act), which will force foreign banks to report bank account information to the IRS for all U.S. citizens regardless of where they reside. The IRS will soon compile this information and might seek out U.S. citizens who are not compliant. The penalties for willfully failing to report this information can be up to 50 per cent of your highest bank account balances, with a minimum of $10,000 per year, per account. There are also certain forms that must be filed with a U.S. tax return. If these are filed late and outside of the Streamlined Program, this can result in penalties of $10,000 per occurrence. Currently, your best option is to come forward under the Streamlined Procedures and become compliant with your U.S. tax filings, which will allow the penalties to be waived. Once you have filed five years of returns, you are able to stand before the U.S. consulate and renounce your citizenship – if you so choose. 

The U.S. government is looking for ways to increase revenue and is more strictly enforcing decades-old penalties as an easy revenue source. U.S. citizens who reside in the U.S. naturally seem unsympathetic when the government targets individuals residing outside of their country. The negative reaction from U.S. citizens living outside of the U.S. has been significant and the IRS has taken steps to simplify matters. But the U.S. government seems unwilling to give up the notion of taxing its citizens no matter where they live.

We strongly recommend that you take steps to become compliant with your U.S. filing obligations promptly, before the IRS steps up enforcement actions. Some effort and expense now can help avoid greater inconvenience and cost later. Contact your Collins Barrow advisor for help. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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