My question is that, in addition to 8854 and 5-year tax returns, are FBARS needed in this example? Thanks!




Mary is a USC as she was born in the US while her parents were attending university here. Her parents obtained a US passport and social security number for her. At a young age the family returned to the UK. Mary renewed her US passport on regular basis and used that passport, as required by US rules, on trips to the US.

Mary pays full tax in the UK (at higher rates) on all her employment and investment income. She is married to a UK national and she has no intention of returning to live in the US other than the occasional holiday. The center of her life is in the UK.

Mary is aware of her USC status but has lost sight of her US tax reporting obligations. Most nations do not impose any tax obligations on their citizens living abroad. That is somewhat of a fundamental principle in the expat community. She recently became aware of an IRS crackdown on failure to file an information return known as FBAR for financial accounts held by USC at foreign institutions. This bit of information arose from the well publicized IRS investigation of UBS regarding hidden Swiss bank accounts.

Mary made some inquires and found out that she had to file US tax returns and the FBAR forms. She also found out the that the failure to file FBARs comes with a minimum $10,000 penalty (and possible criminal charges). Mary is stressed out by these developments. Some expat colleagues have told her not to worry as she pays UK tax at higher rates and through something known as the “foreign tax credit” she will owe no US tax. Her US tax advisor informed her that if she files the FBARs prior to contact by the IRS and indicates that she has paid UK tax on her investment income, assessment of FBAR penalties is unlikely.

Mary has always connected renunciation of citizenship to wealthy individuals trying to flee a large tax bill, however , these developments have prompted Mary to investigate renunciation of citizenship. After a few inquiries she has found out that there is a bit of a backlog at the London Embassy as a large number of USC resident in the UK have made that decision in order to simplify their lives. She too decided to renounce and has made an appointment at the London Embassy. That is the easy part, she must now properly exit the US tax system.

In the course of her research on renunciation she Mary has become aware of a law known as the “Reed Amendment” which prohibits entry into the US by former USCs who have expatriated for tax avoidance purposes. Mary is concerned as she has family to visit in the US (she intends to obtain a visitor visa for future travel to the US). Her lawyer tells her not to be concerned as that law has never been enforced, it may not be enforceable at all, and that “tax avoidance” as defined in the Reed Amendment has no relevance to her situation.

Mary’s net worth is under $2M and therefore she is not subject to the full scope of the Sec. 877A “Exit Tax” but she must file a Form 8854 otherwise the Exit Tax would apply and she would be hit with a $10,000 penalty. Form 8854 requires that Mary certify (and any preparer) that she has fulfilled her US tax obligations for the past 5 years. Mary’s tax advisor informs her that while the Exit Tax may violate the US-UK Treaty and that the IRS may have a difficult time enforcing any penalties in the UK, it best to properly go through the Form 8854 procedure. This will require that Mary file tax returns for the past five years (and a final return for the year of renunciation). No tax is due as her UK tax can be used as a credit. Mary will file Form 8854, her prior year US tax returns, and her final US tax return immediately after the end of the year of renunciation.

We are not here to do your homework.
What do you think and why?

Agreed; clearly homework questions.

I think that FBAR law is not tax law under the Internal Revenue Code, instead it is legislation under the Bank Secrecy Act. The relationship of FBAR penalties to Form 8854 is not clear.
Thus I don't know the exact answer. But I'll suppose that she will also need to file delinquent FBARs and be subject to possible 10000USD penalties.

The analysis put forth in the scenario (that she will NOT be subject to the penalties if she comes forth and files the past-due FBARs with a explanatory cover letter) is accurate In my opinion.

To date, I have submitted in excess of 20 past-due FBARs over the past three years, with NO penalties being assessed.

Expats (especially long term expats with no US income) are very unlikely to be penalized.

But, I do know of cases of US residents (immigrants, but 10+ years in the US ) with small (< 100 K) offshore accounts being audited on submitting delinquent FBARs in the last year or so.

In any cases, if this is an exam question, the answer is that the person could be subject to a penalty, although it should be possible to avoid this with a reasonable cause exception. The Reed Amendment does not apply.