Before you know it, tax returns will be due. Many Americans living overseas have not filed tax returns or so-called FBARs for many years, even though they were required to do so. The Internal Revenue Service’s crackdown on tax evasion through the use of foreign accounts and entities has understandably frightened many of these Americans. Many did not knowingly avoid or evade US tax, nor did they intentionally disregard their tax filing duties. They simply did not understand the tax filing requirements when living and working abroad, or they obtained incorrect tax advice. In fact, in many instances, the typical client I assist owes little, or no tax after taking into account foreign tax credits and foreign earned income and housing exclusion amounts. The problem is that when a taxpayer has a duty to file tax returns, accompanying information returns or FBARs, but does not do so, he is potentially subject to huge penalties.

Pressing upon such taxpayers is the “FATCA Factor”. Commencing this year, under certain provisions of the “Foreign Account Tax Compliance Act” (FATCA), ”foreign financial institutions” will be required to collect information that will be relayed either directly (or indirectly through their local government authority) to the IRS about assets held by US persons with that institution. The FATCA rules will make it very easy for the IRS to cross-reference the information provided by the foreign financial institution with the taxpayer’s Form 1040 to determine whether taxes and reporting on foreign financial assets have been properly undertaken. The first information reports are due to the IRS next year. If the IRS learns of a taxpayer’s noncompliance from the financial institution (e.g., the taxpayer’s non-US bank), the taxpayer will not be eligible for entry into a Voluntary Disclosure initiative. For those with potential criminal tax exposure, this can mean the difference between serving prison time or staying out of jail.

Options Available

While other approaches or variations on approaches exist, the non-filer generally had two major options to come into compliance with the US tax laws: entering one of the IRS Voluntary Disclosure Programs (there have been different programs in 2009 and 2011 and now, a continuing program that started in 2012) or, so-called “quiet” filing of the delinquent returns and / or FBARs for a certain number of prior years (typically 6 years).

Part II will discuss the Voluntary Disclosure Program.

In accordance with Circular 230 Disclosure