# How should I proceed? (From a practical standpoint)



## Bernhard (Nov 22, 2020)

Hello everyone,

I was born in the US (by non-US parents) but have no ties to the US. I was raised in Europe and lived there all my life.

4 years ago I found out about my wonderful US tax obligations and (as recommended by a tax attorney) started filing FBARs. As I was still studying and had no relevant income I never filed an income tax return so far. This year however, I might have to report my income.

My question is about the actual, likely consequences of failing to report? I already did my FBAR for 4 years and have a SSN, so the IRS knows of my existence but do they know of my income in Europe? What about just continuing to file an FBAR (and is it likely that stopping to file the FBAR as well triggers an audit)? Generally, what might be practical consequences of not filing? How can a person without any ties/assets in the US possibly be affected by US penalties?
As this topic caused me quite some headaches so far, I would appreciate any input! Thanks a lot in advance!


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## Bevdeforges (Nov 16, 2007)

To be blunt about it, the IRS has little or no way of finding out about your income outside the US. Normally they rely on the tax documents that employers, banks and financial institutions within the US provide them with each year. Granted, thanks to FATCA they now receive an annual statement from foreign banks and financial institutions on customers with "US indices" (i.e. US birthplaces or SS numbers or other indications that they might be Americans). But so far these annual reports are simply the existence of the accounts plus a year end balance. It's doubtful that the IRS has the capacity to do much with this information unless they have reason to go looking for it - and that, only if there is some major question regarding the person's US tax forms. (Major being something in 6 figures US$)

The IRS has closed down their overseas offices (all 3, or maybe there were 4 of them) so investigating any overseas taxpayer is a fairly costly effort for them. And, for many years and decades now, the IRS is a severely underfunded, understaffed agency. 

You have to do what lets you sleep at night, but until you reach some pretty high income levels (and with income that, for whatever reason, would somehow become "known" to the IRS) your chances of audit from overseas are pretty slim to almost non-existent.


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## Nononymous (Jul 12, 2011)

Bernhard said:


> My question is about the actual, likely consequences of failing to report?


Consequences are basically zero if you are a citizen of the country in which you live, with no US financial ties. The IRS has no legal ability to punish you.

It's not great that you've been filing FBARs, but they are a separate beast from income tax returns, which you absolutely should *not* file. You can continue filing FBARs or stop, likely without any foreseeable consequences. You may or may not be subject to FATCA reporting, depending on the account balance (typically US$50,000 or over) and account type, and whether the bank is aware of your US citizenship. FATCA reporting does include interest/dividend income, but no details of account transactions etc. so the IRS would remain fully unaware of your employment income.

Below, the boilerplate text I post in response to any inquiries from Accidental Americans such as yourself:



> If you are an "Accidental American" - a dual citizen who has lived all or most of your life outside of the US, with no US financial ties - and you discover that you have US tax filing obligations, the absolute WORST thing you can do is rush off to a tax advisor and begin preparing US tax returns.
> 
> Stop, slow down, do some research. If the IRS hasn't found you yet, they aren't going to find you anytime soon. Furthermore, if you are a citizen in your country of residence, and have no US assets or income, the IRS has absolutely no ability to penalize you in any way, shape or form.
> 
> ...


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## Bernhard (Nov 22, 2020)

Thank you both, I definitely feel more at ease now! I am not sure about how to proceed with the FBAR however but I guess I will just continue reporting in order not to raise unwanted suspicion? 

I also read the double taxation treaty in place between my country and the US and found out that income from employment in the public sector is exclusively taxed by the state you work for. Since I work in the public sector, would this liberate me from my reporting obligations or is reporting theoretically something you need to do in any case if you reach the income threshold?


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## Nononymous (Jul 12, 2011)

One way to read the IRS rules is that you must report any and all worldwide income, then you either take the FEIE or FTC to wipe out the US taxes you would owe (this works in almost all cases though there are situations in which a person can end up with a US tax bill). Another way to read the rules - the theory of someone who previously posted here - is that if your country of residence has exclusive taxing rights on your income thanks to the treaty, it is not "taxable income" from a US perspective so therefore you are not obliged to declare it to the US, which generally keeps you under the reporting threshold so you do not need to file tax returns at all. I like this idea. I have no idea if it's correct, but given that the IRS won't learn about your income if you don't tell them, it doesn't really matter which position you take!

I expect you could just stop filing FBARs. People go broke or buy houses or die, it's not unusual for accounts to run low on funds. The US government does not have the resources to follow up.

Coincidentally, I have a question about Austria. There is a non-zero chance of our moving there in a year's time. How strict are the banks about FATCA compliance? I am Canadian but born in the US, so have a US birthplace on my passport. Currently I file nothing and it's very easy to conceal my US citizenship from banks here, so no FATCA concerns at present. But a move to Europe could be more difficult. We have a euro account with an online bank that predates FATCA; it's "clean" and I'm not being reported or restricted, but ultimately we might need something local. If absolutely necessary I would renounce, without filing any tax returns of course because that is not required.


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## Moulard (Feb 3, 2017)

Bernhard said:


> I also read the double taxation treaty in place between my country and the US and found out that income from employment in the public sector is exclusively taxed by the state you work for. Since I work in the public sector, would this liberate me from my reporting obligations or is reporting theoretically something you need to do in any case if you reach the income threshold?


Watch out for the savings clause which fundamentally allows the US to tax its citizens and permanent residents as if the treaty were not in place

Assuming Austria is the treaty country in question, Government Service is only partially protected from the savings clause by article 1 paragraph 5b (trimmed for clarity below)



> The provisions of paragraph 4 shall not affect: b) the benefits conferred by a Contracting State under Articles 19 (Government Service) .... upon individuals who are not citizens of that State, and who, in the case of the United States, do not have immigrant status.


While I cannot find the technical memorandum for the Austrian treaty the wording is very similar to the UK treaty, so I will refer to that instead...



> Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for permanent residence there (i.e., in the United States, a "green card" holder). Thus, for example, a resident of the United Kingdom who, in the course of rendering services to the government of the United Kingdom becomes a resident of the United States (but not a permanent resident), would be entitled to the exemption from source State taxation provided by paragraph 1. _In addition, an individual who receives a pension paid by the Government of the United Kingdom in respect of services rendered to that Government is taxable on that pension only in the United Kingdom *unless the individual is a U.S. citizen* or acquires a U.S. green card._




Thus, as you are a US Citizen, you gain no protection from the savings clause and the US can tax your public sector wages, salaries, pensions etc as if the treaty were not in force.


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## Nononymous (Jul 12, 2011)

Moulard said:


> Thus, as you are a US Citizen, you gain no protection from the savings clause and the US can tax your public sector wages, salaries, pensions etc as if the treaty were not in force.


Though, as a practical matter, the US cannot do this in Austria because it has no enforcement mechanism. (Quite apart from would taxes be owed after using either FEIE or FTC.)


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## Moulard (Feb 3, 2017)

Nononymous said:


> Though, as a practical matter, the US cannot do this in Austria because it has no enforcement mechanism. (Quite apart from would taxes be owed after using either FEIE or FTC.)


Agree wholeheartedly with you on that one. Just because it is taxable doesn't mean that any hard earned would actually be owed. And, as you regularly point out, unless the treaty has a mutual collection clause in it, difficult for them to enforce even if you did.

Really my point of my post was to highlight that the following statement by Bernhard did not take into account the savings clause in Article 1, and thus, was not correct.



> I also read the double taxation treaty in place between my country and the US and found out that income from employment in the public sector is exclusively taxed by the state you work for.


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## Bernhard (Nov 22, 2020)

Moulard said:


> Really my point of my post was to highlight that the following statement by Bernhard did not take into account the savings clause in Article 1, and thus, was not correct.


Thank you Moulard, I totally missed this. The savings clause effectively means that the double taxation agreement has no value for dual citizens right?



Nononymous said:


> Coincidentally, I have a question about Austria. There is a non-zero chance of our moving there in a year's time. How strict are the banks about FATCA compliance? I am Canadian but born in the US, so have a US birthplace on my passport. Currently I file nothing and it's very easy to conceal my US citizenship from banks here, so no FATCA concerns at present. But a move to Europe could be more difficult. We have a euro account with an online bank that predates FATCA; it's "clean" and I'm not being reported or restricted, but ultimately we might need something local. If absolutely necessary I would renounce, without filing any tax returns of course because that is not required.


The banks take FACTA seriously as it seems to me. When I opened a savings account, I was asked if I was a US citizen because of my place of birth. Another time, when I tried to invest in mutual funds, I was told that this would not be possible for me because of my citizenship. As my other bank never brought the question up (pre-FACTA account), I just transfered the money to them. But speaking from my experience, FACTA is definitely a thing in Austria but I have the feeling that if I had just answered "no" back then, no further questions would have been asked. This is just an assumption though.


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## Bevdeforges (Nov 16, 2007)

FATCA (think "fatcat" without the t on the end) is basically one of those things where the banks are saving their own backsides. Technically (although I have yet to hear of this actually happening) if they just accept your word that you're not a US person and then get audited (by, I guess, the IRS), they are the ones who will lose the right to do business in the US. And that's a big deal for banks and financial institutions. 

But most banks are doing their best to make the process as automatic and brainless as possible. Here in France, some banks have just sent their own forms asking about "tax residence" to all customers who appear to be foreigners. Some Italian friends of mine here in France (who have lived here for decades) were asked by their banks to provide FATCA information. Completely a CYA maneuver. But any form they ask you to fill out is retained by the bank - it is NOT submitted to the IRS.


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## Nononymous (Jul 12, 2011)

Bernhard said:


> The banks take FACTA seriously as it seems to me. When I opened a savings account, I was asked if I was a US citizen because of my place of birth. Another time, when I tried to invest in mutual funds, I was told that this would not be possible for me because of my citizenship. As my other bank never brought the question up (pre-FACTA account), I just transfered the money to them. But speaking from my experience, FACTA is definitely a thing in Austria but I have the feeling that if I had just answered "no" back then, no further questions would have been asked. This is just an assumption though.


Thanks, that's about what I expected. If the move happens I may ultimately need to get rid of my US citizenship, which is not that big a deal for me.


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## Moulard (Feb 3, 2017)

Bernhard said:


> Thank you Moulard, I totally missed this. The savings clause effectively means that the double taxation agreement has no value for dual citizens right?


It has some value, just not very much (social security payments, alimony and child support are really the only things protected in the US model treaty.. everything else is subject to negotiation) . 

The key thing the treaty does for you is to force the US into providing tax relief for foreign taxes paid. Which is obviously of no help if the income is tax exempt where you live, and of limited help if you live in a lower taxing jurisdiction.

You have to remember these treaties are not about protecting you from double taxation, their primary purpose is to divide the spoils.


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