Are you a nonfiler? What can you do?

We receive one or two phone calls per week from ordinary Americans living in Spain, telling us that they have not filed US taxes with the IRS (Internal Revenue Service) since they arrived here. They are normal families, with work in Spain, and money in the bank like everybody else. They are not hiding money, they are not delinquents, and they pay taxes in Spain just as any other resident.

Some of them state that they hold both Spanish and US passports, so they’ve only been filing taxes in Spain. They heard that it wasn’t necessary to file the 1040 annually with the IRS. However, some have heard from other Americans that they might have problems in the future, but they don’t know what to do about it. They are afraid of what will happen when they travel to the United States, or what will happen when they renew their U.S. passport. Does the State Department tell the IRS? What will happen when FATCA eventually rolls out in 2015? Will the IRS be able to collect the money directly from their banks in Spain?

The main reason for this situation is incorrect and incomplete information.

So first of all, let’s clarify a few concepts.

The IRS considers “US persons” all U.S. citizens, whether they have another nationality or not. Green Card Holders are also considered “US persons” even if the card has expired.

According to international laws, you must pay taxes in the country in which you have your residence–where you live more than 6 months per year. In our case, let’s say that’s Spain.

As a Spanish resident, you must file the Spanish Tax Return (IRPF) every year before June 30 (no extensions.)  You must report your worldwide income. There are also other taxes that you should pay in Spain: national and “autonomical” taxes, such as Impuesto de Trasmisiones, Sucesiones, Donaciones, Patrimonio, etc., and other forms to report your assets abroad– Modelo 720, and your bank accounts abroad and international money transactions, DD1 & DD2, to the Banco de España.

As a US citizen you must file a 1040 to the IRS every year, reporting your worldwide income, too.

Considering that in Spain you pay higher income taxes then in the US, and that both countries have signed a Tax Agreement (Feb 22, 1990) for the avoidance of double taxation, the normal thing would be that you end up paying taxes in Spain and none in the US. But this does not exclude you from the obligation of annually filing a 1040 to the IRS.

There is also the “Foreign Earned Income Exclusion” which the IRS grants you with $95.400 (2013) from your foreign earned income for which you do not have to pay taxes. But again, it does not exclude you from the obligation of filing a 1040 annually.

 

The Voluntary Disclosure Program…

Then you reach the point when you would like to clean up your current situation with the IRS. After talking to other Americans, reading all kinds of reports and searching the IRS web page, you realize that there are different opinions and ways to proceed. And not everybody agrees.

We are sure that everyone has different tax situations and everyone needs personalized advice.  Do you need to follow the Voluntary Disclosure Program that the IRS recommends for nonfilers? To file the past six years of 1040 and 10 years of FBAR?

There are only three ways to clean up a tax mess:

1) Voluntary Disclosure Program: The IRS began the last open-ended off-shore voluntary disclosure program (OVDP) in January 2012 on the heels of strong interest in the 2011 and 2009 programs. The IRS may end the 2012 program at any time in the future, and  is offering those with undisclosed income from offshore accounts another opportunity to get up-to-date with their tax returns. The 2012 OVDP has a higher penalty rate than the previous program, but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution. The OVDP involves filing at least the last six years of the 1040, Individual Tax Return, and ten years of the FBAR, Foreign Bank Account Report.

In general terms, this might not be the best procedure for those Americans whose regular income comes solely from Spain and who pay regular taxes as residents of the country. If you apply for the disclosure program, you could discover later that it is not the appropriate program for you. Once you have been accepted into the disclosure program, the IRS will ask you for a two-page list of documents that you might not be able to provide because this program is clearly geared to Americans in a different situation.

2) Streamlined Procedure Program: A relatively new IRS program for Americans abroad who are “low risk” in the eyes of the IRS. It went into effect on September 1, 2012. The procedure was implemented in recognition that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), but have recently become aware of their filing obligations and now seek to come into compliance with the law. These new procedures are for non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns.

It is important to find out the risk level determined by the IRS beforehand, based on the information provided on the returns filed and on additional information provided in response to a Questionnaire required as part of the submission. Only low risk tax payers can benefit from the Streamlined Procedure Program.

3) And finally, just file your last 4 years of tax returns; what people call “quiet disclosure.” This is nothing special, because you’re just doing what you were supposed to do all along, except late. This is normally our suggestion for 99% of the ordinary Americans residents of Spain who have been paying annual taxes in this country.

To sum up, it is important to remember that the Voluntary Disclosure Program is not the only way for an ordinary American abroad to rectify problems with the IRS. In fact, it is quite often the wrong way to do it.

If you need more information, please contact us at:

info@ustaxconsultants.es Tel: +34 915194392