The Internal Revenue Service (U.S. tax administration) issued guidance (in the form of Fact Sheet FS 2011-13) on international tax reporting requirements for U.S. citizens or dual citizens residing outside of the United States.
In essence, the Guidance provides that U.S. citizens or dual citizens living and working abroad with (1) no tax balance due on their U.S. income tax returns (due, for example, to foreign tax credits for foreign taxes paid on their unreported foreign income earned in a foreign country, which offsets any U.S. tax due on that income, or U.S. foreign earned income exclusion excluding from U.S. tax certain employment income earned outside of the U.S.) or (2) a tax balance due but where the failure to report foreign income and pay associated residual U.S. taxes on it was due to reasonable cause (lack of proper advice or knowledge about the duty to report and tax such income), can file delinquent or amended tax returns and rectify past mistakes and will not be assessed late filing or late payment payment penalties. In addition, there will be no penalties assessed on those same individuals with respect to late filings of their Foreign Bank Account Reports reporting foreign financial assets if their failure to file was also due to reasonable cause.
The Guidance includes two examples: one where the income tax return results in no balance due and the other where a balance is due, with an explanation of reasonable cause for failure to file resulting in no penalty for late filing of income tax return, late payment of income, or late filing of FBAR.
In general, in order to establish reasonable cause for failure to file or report foreign income, the taxpayer must show that the failure was not due to negligence and that “ordinary business care and prudence in meeting tax obligations” were exercised. The IRS will evaluate the facts and circumstances of each case and, depending on the taxpayer’s situation, a lack of knowledge or proper advice of U.S. filing obligations may constitute reasonable cause.
It should be noted by taxpayers covered by this guidance that, beginning with 2011, individuals with greater than $50,000 in foreign financial assets will need to include IRS Form 8938 with their individual tax returns. Form 8938 is due with the U.S. tax return within the same deadline and it is separate and in addition to the FBAR.