Tax non-compliant, you might be ok!

Oct 23, 2015

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 the instances in which your friend is ok. The IRS has programs such as the “Streamlined Foreign Offshore procedures” to remove any penalty.  But I am limiting these posts to instances in which such program would be unnecessary).

This discussion is only meant as 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:

Income tax:

  • 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.

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