After 32 years of IRS work — and more than $100 million in resolved tax debt — I've seen just about every version of the problem you're dealing with. I'm Darrin Mish, a tax attorney in Tampa. Here's what you should know.
Dual Citizen’s Taxes
The United States practices worldwide taxation which means if you are a taxpaying citizen or resident alien living outside the US, you must declare your income both to your host country as well as to the IRS for the year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction. In addition to filing your federal income tax returns you are also obligated to file the Reports of Foreign Bank and Financial Accounts (FBARs). Failure to file either or both these forms will result in heavy penalties. However, the IRS says you will only be required to file your taxes up to 6 years back.
Under the Inland Revenue Code section 6651, the penalty is 5% of the amount of tax required to be shown on the return unless you can convince the IRS that the failure is due to reasonable cause and not willful neglect. If the failure continues for more than one month, an additional penalty of 5% may be imposed for each month or part thereof during which the failure continues. The total failure to file penalty cannot exceed 25%. However, if there is no penalty then no tax will be due.
On the other hand, if you did file your returns but failed to pay the amount of taxes due the penalty starts on the due date of the return (determined without regard to any extension of time for filing the return) and is 0.5% of the amount of tax shown on the return. If the non-payment continues for more than one month, an additional 0.5% penalty may be imposed for each additional month or part thereof as long as any part of the taxes remains outstanding. The total failure to pay penalty cannot exceed 25%. Again, no penalty is imposed if you do not owe any taxes.
If you are guilty of both non-filing and non-payment, the failure to file penalty is reduced by the amount of the failure to pay penalty for any month in which both transgressions are committed.
If you have to prove that there was reasonable cause for non-compliance, you have to show the IRS that you exercised “ordinary business care and prudence” in meeting your tax obligations but nevertheless failed to meet them. Generally, ordinary business care and prudence will depend on your reasons given for not meeting your tax obligations, your track record of tax compliance, how long it was between your failure to meet your tax obligations and your subsequent compliance and whatever circumstances were out of your control.
One more thing…failure to file FBARs carry a separate penalty.