ARTICLE
26 September 2011

Important Compliance Considerations For US Citizens

WL
Withers LLP

Contributor

Trusted advisors to successful people and businesses across the globe with complex legal needs
United States citizens and ‘greencard holders’ who live outside the United States must still report and pay US tax on their worldwide income.
United States Tax
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United States citizens and 'greencard holders' who live outside the United States must still report and pay US tax on their worldwide income. Further, anyone born in the United States (and many born outside the United States to one US citizen parent) automatically has US citizenship, regardless of whether they have a US passport. 'Accidental' US citizenship is increasingly relevant as families become more international.

In recent years, Congress and the US Internal Revenue Service have become convinced that many Americans, including those living outside the United States, are not complying with their US tax payment and filing obligations. This conviction has led to multiple (including some very recent) investigations by the US Department of Justice and indictments of international banks, bankers and Americans account holders. This conviction also has led to the development of a number of tools at the IRS's disposal to ensure that Americans worldwide comply with their US tax and reporting obligations.

These tools include the Foreign Bank Account Reporting ('FBAR') form, 'foreign financial asset' reporting, the Foreign Account Tax Compliance Act ('FATCA'), and the IRS Global High Wealth audit unit. Even though another weapon, the 2011 Offshore Voluntary Disclosure Initiative, formally ended on 9 September 2011, these measures (not to mention the potential volume of information from whistleblowers, disgruntled bank employees and prior voluntary disclosures under the 2009 and 2011 programmes) will put increasing pressure on non-compliant Americans, who should 'come clean' as soon as possible. It is still possible for non-compliant Americans and greencard holders to become compliant despite the end of the formal 2011 programme.

For example, under FATCA, 'foreign financial institutions' such as banks, hedge funds, private equity funds and trust companies must implement procedures to identify and ultimately disclose their US customers to the IRS starting in 2013. As a consequence, some organizations have chosen to decline US clients and more may follow suit. Furthermore, institutions will become more diligent in identifying whether their customers might be Americans or greencard holders despite holding other passport(s).

Further, a US taxpayer must file an FBAR reporting all of their foreign financial accounts if those accounts exceed $10,000 in the aggregate. Legislation enacted in 2010 also requires US taxpayers to report certain 'foreign financial assets', including non-US accounts, stocks and securities of foreign issuers and interests in foreign entities, if the aggregate value of these assets exceeds $50,000. Substantial penalties may apply if a taxpayer fails to make the required disclosures. Presumably, the IRS will look to match taxpayer and 'foreign financial institution' reporting to identify taxpayer non-compliance.

Finally, the IRS created a Global High Wealth unit to understand the complex structures of high net worth taxpayers, including trusts, private foundations and partnerships, and increase compliance among high net worth taxpayers. The IRS anticipates starting a 'GHW' review with a high net worth individual's tax return and branching out to returns of family members, retirement plans, related private foundations and business entities.

Given the tools available to the IRS, Americans who are non-compliant should 'come clean' as soon as possible or they may find it increasingly more difficult to do so without substantial cost and, potentially, criminal exposure. It is best to first investigate the options with a US tax lawyer in order to maintain the attorney-client privilege that might not apply for other types of professionals.

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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