If you were expecting a nice Christmas gift from Uncle Sam, you will be disappointed.  A rumored relief for dual nationals filing US income tax and financial accounts forms did not quite materialize.  Instead what the IRS issued on 8 December was another Fact Sheet (2011-13) in which they reiterate the obligations of ALL US citizens to file annual income tax returns and to file the financial information return commonly referred to as FBAR.

The only good news is that the IRS identified some examples where a US citizen can claim ‘reasonable cause’ for failure to file these returns and avoid penalties.   But it is clear that it is up to the IRS agent to decide what constitutes reasonable cause and is heavily influenced by whether there is any US income tax liability resulting from the late filing after considering the foreign earned income exclusion or the foreign tax credit.

The expectation of the US Treasury Department is that delinquent filers will submit returns for the past six years, together with a written explanation of why the returns were not timely filed previously.

The IRS also waved the heavy stick reminding US citizens, dual nationals and expats, of severe penalties for willful failure to file the FBAR:  the greater of $100,000 or 50% of the value in the foreign account!  This is on a return that has no tax calculation, just an ‘information return’ showing where the US citizen has financial accounts if the combined balances exceeded a minimal threshold of $10,000 at any time during the year.  This means savings, checking accounts and other financial accounts as defined in the instructions to the form TD F 90-22.1 which can be downloaded from the IRS website at  http://www.irs.gov/pub/irs-pdf/f90221.pdf .

If you are a dual national and have not filed income taxes with the US but have been filing with the country in which you live then you are probably safe on income taxes unless you are a very high income earner. The penalty for late filing or paying US Income taxes is determined by the amount of the tax owed, and is a maximum of 25% of the tax.  If the return shows no tax due, there is no penalty.