Strange as it might sound, the IRS is looking to generate more tax revenue from sources in other countries. As part of its comprehensive efforts to improve compliance, the IRS recently announced plans to help U.S. citizens who reside abroad, including those who have dual citizenship, to meet federal tax law requirements. The program will also provide assistance to dual citizens who participate in foreign retirement plans.

Volunteers with Foreign Accounts Continue to Step Forward

The offshore voluntary disclosure programs initiated by the IRS are a rousing success.

The IRS recently announced that it has received payments of more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programs. Another 1,500 disclosures have been made under the latest program implemented in January 2012, which will be open for an indefinite period.

"We continue to make strong progress in our international compliance efforts that help ensure honest taxpayers are not footing the bill for those hiding assets offshore," said IRS Commissioner Doug Shulman. "People are finding it tougher and tougher to keep their assets hidden in offshore accounts."

The voluntary disclosure programs are part of a broader effort by the IRS to deter offshore tax evasion and ensure tax compliance. It includes beefed-up enforcement, criminal prosecution and implementation of third-party reporting through the Foreign Account Tax Compliance Act (FACTA).

The IRS also tightened its eligibility requirements in one respect: If a taxpayer challenges disclosure of tax information by a government in a foreign court, the taxpayer is required to notify the U.S. Justice Department of the appeal. Taxpayers who fail to comply with this requirement are no longer eligible for the offshore voluntary disclosure program.

"We are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues," said IRS Commissioner Doug Shulman.

The new plans include an option for U.S. citizens and others residing abroad who haven't filed their tax returns. These wayward taxpayers may qualify if they owe little or nothing in taxes. The option will first become available on September 1, 2012.

The IRS has long been aware of the existence of problems relating to U.S. taxpayers living overseas. In many cases, these taxpayers fail to file tax returns in a timely fashion -- or simply don't file tax returns at all -- causing tax liabilities and penalties. Furthermore, taxpayers often fail to file reports of Foreign Bank and Financial Accounts (FBARs).

Basic FBAR Requirements

By June 30 each year, citizens and residents of the United States, as well as domestic partnerships, corporations, estates and trusts, must generally file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) if:

1. They have a direct or indirect financial interest in, or signature authority over, one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts.

2. The total value of the accounts exceeds $10,000 at any time during the calendar year.

The IRS has created new procedures allowing certain taxpayers to satisfy their obligations without facing penalties or enforcement actions. To qualify, an individual must have a simple tax return and owe $1,500 or less in tax for any appropriate tax year.   

Taxpayers using the new procedures announced by the IRS will be required to file delinquent tax returns along with appropriate related information returns for the past three years, and to file delinquent FBARs for the past six years. Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three tax years.

The IRS also will allow taxpayers to resolve issues relating to certain foreign retirement plans such as the Canadian Registered Retirement Savings Plans. Current tax treaties may provide income deferral under U.S. tax law, but only if an election is made on a timely basis. The new streamlined procedures will be made available to low-risk compliance situations.

Finally, the IRS announced that its offshore voluntary disclosure programs have exceeded the $5 billion mark (see right-hand box for more information). The IRS has a current program, which allows individuals with foreign accounts they haven't disclosed to come forward in exchange for lower penalties and to possibly avoid criminal prosecution.

If you are interested in the IRS program for dual citizens, or you have an undisclosed foreign account, consult with your tax adviser about how to proceed. A taxpayer needs to determine the full extent of possible federal (and state) taxes and penalties that could be imposed before making a voluntary disclosure.

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