US citizens in Australia and Australian residents with US bank accounts and investments are a focus of information sharing activities between the ATO in Australia and the IRS in the USA.
Last month (Sept 2015) the ATO provided the IRS with details of over 30,000 financial accounts for the IRS to review to determine if US citizens have complied with their US tax obligations. These accounts hold over A$5b; it seems highly likely that there would be a number of US citizens here who should be nervous about whether they have complied with their US tax laws.
In return the IRS is providing an as yet unquantified amount of information regarding accounts in the US that are linked to Australian resident taxpayers – this will include many of the US citizens mentioned above, as well as a number of other Australian residents.
This is not a one-off exchange; both countries will continue to exchange information about taxpayer assets and activities.
So what is the law and the risk?
Australian tax residents are taxed on their worldwide income, so any US bank accounts which earned interest which has not been declared may now come to the ATO’s attention. Further, any deposits into these accounts will be queried and the taxpayer will need to prove that the deposit is not undeclared income. The tax itself is not all that is at stake – penalties and interest for non-disclosure also are likely to be applied, particularly given that Australians had the tax amnesty last year. If an individual had the opportunity last year and didn’t take it then the ATO is probably going to be sceptical about any excuse given now.
Australian temporary residents and non-residents are not taxable here on investment income, however they too will have to show that deposits into controlled US accounts are not employment, contracting or business income earned in Australia.
The situation is very different for US citizens.
The IRS has two separate sets of rules which a US citizen must comply with. Failure to comply can result in USD10,000 penalties per year, regardless of whether any tax is due. Of course there is also the possibility of tax, penalties and interest as well.
US citizens moving abroad have a requirement to lodge various forms with the IRS to advise the change in their residency status. Failure to do so means that they continue to be subject to US tax on their worldwide income, as well as the USD10,000 penalty noted above and possible criminal sanctions.
Further, US citizens continue to have an obligation to lodge a US tax return regardless of whether they have tax residency of another country. This can change if they renounce their citizenship, however even in such cases there are lodgement obligations up to that time. There are also reporting obligations under the ‘Report of Foreign Bank and Financial Accounts’ (known as FBAR) each year. The FBAR report also has a USD10,000 penalty for late lodgement.
As you can imagine, this can get very expensive very quickly.
The risk for US citizens arises where they have not complied with the IRS’ required rules, leaving them with potentially large exposures to penalties and tax liabilities. I have heard of situations where individuals born in the US who moved to Australia when they were babies or young children who as adults discover that they have significant US income tax and penalty exposures. I also understand that there is some risk that US Immigration can detect and detain individuals who are deemed by the IRS as being in tax non-compliance.
Given these risks I think that anyone with undisclosed foreign accounts or unmet Australian or US tax obligations may want to sort themselves out before Uncle Sam and Chris Jordan start asking the questions!