This post is for those who have friends who might not be tax compliant. My goal is to put a little bit of perspective so that you know instances in which your friend is ok. The IRS has programs such the “Streamlined Foreign Offshore procedures” to remove any penalty. But I am limiting this posts to instances in which such program would be unnecessary).
This discussion is only meant as a general guidance for those with potentially non-tax compliant friends.
No filing requirement:
This one probably doesn’t apply to the kind of people you hang out with, but if the following applies, there wouldn’t be a filing requirement:
Income tax return:
- His/her income was less than $10,000 (2014 amount, it is indexed for inflation – for the geeks out there, it is the sum of the personal exemption and the standard deduction) and he/she did not own a foreign corporation or trust.
In this case, he/she was not required to file a tax return, and the fact that he/she didn’t is just fine.
Foreign Bank and Financial Accounts (FBAR):
- Even if he/she might have non-US bank accounts, the aggregate balance of such accounts was less than $10,000.
Here again, he/she was not required to file an FBAR report (form Fincen 114, now electronic).
No tax due, no penalty:
- No foreign corporation, no foreign trust, less than $200,000 in foreign bank accounts – each of these forms come with a potential penalty (typically x times $10,000)
- The two main ways for US citizens living outside the US to reduce tax owing are:
1) The foreign tax credit: If your friend pays tax more tax to a foreign country than would be owing in the US, he/she would, generally, get a credit to offset the US tax owing.
2) The foreign earned income exclusion: That’s the digital nomad’s favorite. There are 2 ways to qualify for it: either the physical presence test (spend 330 days in a foreign country in any 12 month period) or the bona fide resident test (you have roots in a foreign country: typically a permanent resident card and are treated as a resident there for tax purposes)
The late filing penalty and interest are based on the amount of tax owing – your friend would have a filing requirement, but he/she could use the regular procedure since no penalty would be assessed anyway.
The penalty in place, not typically requested:
On the FBAR front, if your friend has past due FBAR reports and didn’t do anything funny to hide the money from the US authorities, then he/she should just file the damn FBAR report. The IRS/FinCEN wouldn’t request penalties – again provided they have not been contacted by the IRS regarding their failure to file the FBARs (or under a civil audit or criminal investigation by the IRS)
Short of that:
Well, short of that, there’s still hope to have penalties removed but that would involve asking the IRS to be nice with your friend.