Working Overseas - Dual Citizenship --Is filing a tax return required


P

Patrick

Greetings,

I am asking this question on behalf of my sister who lives
in Italy.

Main Question: Does my sister have to file a tax return?

My sister was born in Italy, daughter of US citizens working
in Italy.

She has dual nationality/citizenship, American (US) and
Italian. She is married to an Italian. She is a school
teacher in Italy and earns about $30,000 teaching at an
Italian public school. She has absolutely no income from
the US or US companies, no properties,holdings, accounts,
nothing in the US. She files an Italian tax return with the
Italian government and pays her Italian taxes on her Italian
wages.

Each year she files a US tax return and pays no taxes in/to
the US.

About 10 years ago she went to the US Embassy in Milan and
was told that even if she owed absolutely no US taxes, she
had to file US tax returns.

(1) Is she required to file a US tax return?

(2) Since she owes no money to the US Government, if she
does not file a US tax return, are there any applicable
penalties? (I thought penalties were only applicable if
taxes were due.)

(3) If penalties are applicable, what is the exact amount of
the penalty? She is paying an "international" accountant to
prepare her US tax return. Who knows, the penalties may be
less the accountant's fee!

(4) Besides the possible penalties, is there any other
disadvantage in her not filing her US tax return? (E.g.,
passport restrictions/denial, etc.) She comes to the US
about once every 10-15 years for a family visit.

Thanks!

Patrick
 
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L

L K Williams

Patrick said:
I am asking this question on behalf of my sister who lives
in Italy.

Main Question: Does my sister have to file a tax return?

My sister was born in Italy, daughter of US citizens working
in Italy.

She has dual nationality/citizenship, American (US) and
Italian. She is married to an Italian. She is a school
teacher in Italy and earns about $30,000 teaching at an
Italian public school. She has absolutely no income from
the US or US companies, no properties,holdings, accounts,
nothing in the US. She files an Italian tax return with the
Italian government and pays her Italian taxes on her Italian
wages.

Each year she files a US tax return and pays no taxes in/to
the US.

About 10 years ago she went to the US Embassy in Milan and
was told that even if she owed absolutely no US taxes, she
had to file US tax returns.

(1) Is she required to file a US tax return?

(2) Since she owes no money to the US Government, if she
does not file a US tax return, are there any applicable
penalties? (I thought penalties were only applicable if
taxes were due.)

(3) If penalties are applicable, what is the exact amount of
the penalty? She is paying an "international" accountant to
prepare her US tax return. Who knows, the penalties may be
less the accountant's fee!

(4) Besides the possible penalties, is there any other
disadvantage in her not filing her US tax return? (E.g.,
passport restrictions/denial, etc.) She comes to the US
about once every 10-15 years for a family visit.
Yes, as long as she is a U.S. citizen she must file a tax
return if she has ANY income of her own.

She does not have to pay anything to the IRS because her
income is less than the maximum foreign earned income
exclusion ($80,000). In order to claim this exclusion, she
must file a return and give IRS enough information for them
to determine that she is eligible for it.

If she does not file, she does not get the exclusion and
there are limitations on her ability to claim it at a later
time. If IRS ever comes after her for not filing, she is
barred from taking the exclusion and then she WOULD owe
taxes. Plus, she would owe penalties for not filing (as
much as 25% of the tax due), late payment penalties (also as
much as 25%), and underpayment of estimated tax penalties.

I'm not sure about passport issues but I have had clients
who were denied passport renewals because of problems with
IRS,
 
A

A.G. Kalman

You may want to check with the accountant or look at the
copies of the tax return to determine how her returns in the
US are being filed. I'm asuming that as an Italian citizem
also married to an Italian, she is a lawful permanent
resident of Italy. As such, the tax treaty between the US
and Italy states that her performance of services in Italy
is taxable in Italy. As such, she does not have any US
gross income (to keep this simple, I've assumed that she had
no other type of income (interest, dividends, capital gains,
etc. that are US source income) subject to US tax.
Therefore, she does not have to file a US tax return as she
does not have enough income for her filing status. However,
as she would be claiming exemption due to a tax treaty she
would have to file IRS Form 8833 (the disclosure form) for
each year that she invokes the treaty. Failure to file this
form when invoking treaty provisions could make a taxpayer
subject to a $1000 penalty. However, she could also invoke
the rule that allows a taxpayer to exclude foreign earned
income. In this case, she would have to file and report her
income (Form 1040) and then exclude it (Form 2555) and
therefore not pay any tax. This is why you need to look at
what the accountant has been doing.

Lastly, the failure to file penalty is a percentage of the
tax due (5% permonth for a maximum of five months). Any
number times zero is zero.

Alan
http://taxtopics.net
 
S

Stephen Gallagher

My sister was born in Italy, daughter of US citizens working
in Italy.

She has dual nationality/citizenship, American (US) and
Italian. She is married to an Italian. She is a school
teacher in Italy and earns about $30,000 teaching at an
Italian public school. She has absolutely no income from
the US or US companies, no properties,holdings, accounts,
nothing in the US. She files an Italian tax return with the
Italian government and pays her Italian taxes on her Italian
wages.

Each year she files a US tax return and pays no taxes in/to
the US.

About 10 years ago she went to the US Embassy in Milan and
was told that even if she owed absolutely no US taxes, she
had to file US tax returns.
Yes. The US is quite unusual in this position, since
the international standard is generally that taxation
of income is based on either residency or source of
income, not on citizenship. The US does choose to impose
taxes based on citizenship.
(1) Is she required to file a US tax return?
If her income exceeds the level that requires that
a tax return be filed, then yes, she must file a US
tax return, even if her income is not from US sources
and even if no taxes are due.
(2) Since she owes no money to the US Government, if she
does not file a US tax return, are there any applicable
penalties? (I thought penalties were only applicable if
taxes were due.)
At one time, the IRS said that if a return was not filed
by an expat citizen, then they could later deny that person
the right to use the foreign earned income exclusion which
normally eliminates the US tax due. I don't know if they
still do this, or if they will deny the foreign tax credit
(which allows credit for foreign taxes paid on overseas
income). If they really can deny this exclusion and
credit then the penalty would be that the taxes would be
due, versus not having to pay any tax if the return were
filed on time.
(3) If penalties are applicable, what is the exact amount of
the penalty? She is paying an "international" accountant to
prepare her US tax return. Who knows, the penalties may be
less the accountant's fee!
As I understand it, the US government can refuse to renew
a passport, if tax returns are not being filed.
(4) Besides the possible penalties, is there any other
disadvantage in her not filing her US tax return? (E.g.,
passport restrictions/denial, etc.) She comes to the US
about once every 10-15 years for a family visit.
As mentioned, there is the possible refusal to renew
her US passport on the basis that she is not filing
her returns.

Stephen Gallagher
 
S

Stephen Gallagher

I'll make it quick and simple. She is a US citizen. She is
required or not required to file based on her gross income.
Whether she ends up owing or not is not part of that
equation. As to disadvantages, well at the extreme end,
intentional non-filing can result in criminal prosecution.
Your posting is correct. It would be better if the US were
to bring itself into line with the tax policies of nearly
every other country in the world, and impose taxes based
on residency or source of income, rather than on citizenship.
However, at this current time, a person who is a US citizen
is subject to US income tax, whether they live in the US
or abroad and whether the income is from the US or from
foreign sources.

Stephen Gallagher
 
P

Patrick

Thanks to all that replied. She is going to keep on filing
her tax returns.
 
R

Rich Wales

A.G. Kalman said:
As the personal services income would be excluded under
the treaty, she would not have enough income to have to
file a tax return.
Are you suggesting, then, that the provisions of the tax
treaty regarding gross income override IRC 61(a)? (This is
intended as an honest question, not facetious or
rhetorical.)

But isn't the savings clause in the treaty designed
precisely to ensure that the IRC will still apply in full to
US citizens?

Rich Wales (e-mail address removed) http://www.richw.org
*DISCLAIMER: I am not a lawyer or professional tax adviser. My
comments are for discussion purposes only and are not intended to
be relied upon as legal or professional advice.
 
E

Eliah Grabbet

L K Williams said:
I'm not sure about passport issues but I have had clients
who were denied passport renewals because of problems with
IRS,
A US citizen working abroad could easily claim that her
income is under the threshold so that she does not need to
file a tax return. The consulate would have a hard time
disproving this. In any case, wouldn't the individual's
freedom to travel trump the government's right to collect
taxes?

============================================================
Moderator:
"Freedom to Travel" will not be discussed in this forum.
============================================================
 
S

Stephen Gallagher

I'm not sure about passport issues but I have had clients
A US citizen working abroad could easily claim that her
income is under the threshold so that she does not need to
file a tax return.
The filing threshold is quite low. For example, a single
person would have to file a return for 2002 if his
worldwide gross income was $7,700 ($8,850 if 65 or older).
The consulate would have a hard time disproving this.
The consulate wouldn't really be doing anything, other than
acting on the advice of the Internal Revenue Service. If the
consulate had a red flag on your social security number,
which you must give to get a passport, they would tell you
that they've been advised not to issue you a passport and
that you had to deal with the IRS to clear the issue first.

The IRS would not have to prove that you were supposed to
file a return, but that you did not. They would tell you to
prove that your income was low enough that you did not have
to file a return. Obviously, a person with income of less
than $7,700 dollars would have to be supported by someone
else, so they would want you to prove this. A lot of the
issue is based on your prior tax history. If, historically,
you have been filing returns for many years, and then you
suddenly stop filing, then it will raise a red flag in their
computers, and they'll want to know why you're not filing
any more.

Stephen Gallagher
 
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A

A.G. Kalman

A.G. Kalman wrote:
Are you suggesting, then, that the provisions of the tax
treaty regarding gross income override IRC 61(a)? (This is
intended as an honest question, not facetious or
rhetorical.)

But isn't the savings clause in the treaty designed
precisely to ensure that the IRC will still apply in full to
US citizens?
Yes, a treaty can trump Sec 61. The savings clause gives
the "state" the right to tax the income not withstanding
some other section of the treaty. It doesn't say the
"state" will tax that income. It's there to capture income
that may, for whatever reason, go untaxed. In this instance,
we had an italian citizen, married to another italian
citizen, working in Italy and I assumed a resident of Italy
as well. I can't see any reason why the U.S. would elect to
exercise the savings clause to force this individual to file
a tax return that would not realize any U.S. tax.

Alan
http://taxtopics.net
 
S

Stephen Gallagher

The consulate wouldn't really be doing anything, other than
Dual citizenship. Just get an Italian passport (I think this
was where the original person was living) and this is
avoided.
She is required to use a US passport to enter the US, even
if entitled to hold another passport. The Internal Revenue
Service uses this as a way to enforce the requirement to
file US tax returns even while living abroad. If US tax
returns are not filed, when they are required, one of the
penalties can be a refusal to issue or renew a passport,
along with the potential interest and fines that can
accompany a failure to file a timely tax return.

Stpehen Gallagher
 
R

Rich Wales

A.G. Kalman said:
Yes, a treaty can trump Sec 61.
I can see that -- since, AFAIK, a treaty overrides all other
federal law, except the Constitution.
The savings clause gives the "state" the right to tax
the income notwithstanding some other section of the
treaty. It doesn't say the "state" will tax that income.
The savings clause itself may not say this, but it seems to
me that the IRC does. The effect of the savings clause, as
I've understood it, is to cause a US citizen's foreign
earnings to be subject to US law (i.e., the IRC), just as if
the tax treaty didn't exist.
In this instance, we had an Italian citizen . . . .
Not exactly. The person in question has both Italian and US
citizenship -- which means that the US will ignore her
Italian status entirely and will only pay attention to the
fact that she is a US citizen.

And the savings clause of the tax treaty says that US
citizens can be taxed according to the US tax law, even if
other parts of the treaty would appear to say otherwise.

And the US tax law (the IRC) says the total worldwide income
of any US citizen is subject to US taxation (except insofar
as provisions like the Foreign Earned Income Exclusion
and/or the Foreign Tax Credit come into play).
I can't see any reason why the U.S. would elect to
exercise the savings clause to force this individual
to file a tax return that would not realize any U.S.
tax.
But that "election" has in fact been made (has it not?), by
virtue of the fact that the IRC (which governs the situation
because the savings clause of the tax treaty says it can)
says any US citizen with sufficient income (including all
income from all sources worldwide) must file a tax return.

I'll concede that I might be misinterpreting the way the tax
treaty's savings clause works, but if I am mistaken, I'd be
grateful if you could point to either an IRS publication, or
case law, that makes the correct interpretation clear.

Rich Wales (e-mail address removed) http://www.richw.org
*DISCLAIMER: I am not a lawyer or professional tax adviser. My
comments are for discussion purposes only and are not intended to
be relied upon as legal or professional advice.
 
A

A.G. Kalman

(e-mail address removed) (Rich Wales) wrote:
[big snip]

I'm trying to keep this to a narrow purpose: the requirement
to file a US tax return in certain situations.

The savings clause exists to ensure that there is no fiscal
evasion either intentionally or unintentionally. It fosters
disclosure. The clause states that the contracting state
reserves the right to tax its citizens as if the treaty did
not exist. Generally, there is also a clause that exempts
certain types of income from the savings clause itself.
There is also a clause that states the savings clause
doesn't override the avoidance of double taxation article or
the nondiscrimination article. The article is always
written using the phrase "may tax" not "will tax." The US
wants the right to tax its citizens on their worldwide
income when it is necessary and/or required to prevent
fiscal evasion.

My point is that an individual with dual citizenship who
works, lives and pays taxes to the non-US country and makes
full disclosure on a treaty based return position that would
not generate any US tax (either the FTC or the earned income
exclusion wipes out any liability) would not be forced by
the IRS to file a 1040.

I do agree that a US citizen has a legal obligation to
either adequately disclose the reason why the return was
not filed unless there is a specific exception in the 6114
regulations, or to file a return.

I have no citation.

Alan
http://taxtopics.net
 
L

L K Williams

David Rosenbaum said:
"Patrick" <patrizio@canada.com> wrote:
This question has been quite answered, so I'll just make a
few comments:
Stephen G. wrote:
I will add one comment to this. The IRS is still enforcing
the regulation that says a return claiming the exclusion
must be filed within one year of the normal due date. Last
year, we had at least one instance where the exclusion was
denied on a late filed return. They seem to be inconsistent
on this, though, as other late returns were accepted.
 
R

Rich Wales

Stephen said:
If the consulate had a red flag on your social
security number, which you must give to get a
passport, they would tell you that they've been
advised not to issue you a passport and that
you had to deal with the IRS to clear the issue
first.
AFAIK, US passports are =not= withheld from US citizens who
haven't been filing tax returns.

Note that the US passport application does not make
disclosure of one's Social Security Number a requirement for
getting a passport. Wilful or negligent failure to supply
one's SSN when applying for a passport can result in a fine,
of course, but a US passport is still issued under such
circumstances AFAIK.

I would assume, though, that someone who was seriously
remiss in his tax obligations, and who revealed his identity
in order to get a US passport, would probably be put on a
watch list for arrest at the border in the event he were to
come to the US (or possibly other countries with suitable
extradition provisions with the US).

Rich Wales (e-mail address removed) http://www.richw.org
*DISCLAIMER: I am not a lawyer or professional tax adviser. My
comments are for discussion purposes only and are not intended to
be relied upon as legal or professional advice.
 
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L

L K Williams

A US citizen working abroad could easily claim that her
income is under the threshold so that she does not need to
file a tax return. The consulate would have a hard time
disproving this. In any case, wouldn't the individual's
freedom to travel trump the government's right to collect
taxes?
That is not the way it worked for the latest instance I am
aware of. A potential client (de did not want to pay our
fee, however) had not filed for a number of years. He had
been living and working in Thailand for those years. When
his passport was about to expire, he went to the Embassy
here to apply for a new passport. He was told that there
was a notation on his record that IRS had placed there. As
a result, they refused to issue a new passport and referred
him to the State Department, in Washington,. DC. Because of
his reluctance to pay our fee for preparing the necessary
returns, he did not come back and I do not know the final
result. All I know is that the Embassy here would not renew
his passport or issue him with a new one because of the
reference to the IRS.
 

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