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Tax tips for U.S. citizens living overseas

There is a lot of speculation about what the U.S. Internal Revenue Service (IRS) intends with regard to its latest initiative for taxing foreign bank assets and income. For readers from the U.S., here’s some insight on the subject and how it may apply to you.

According to international tax specialist Patrick Martin, of the firm Procopio, Cory, Hargreaves & Savitch LLP, in February of 2011, the IRS announced a program for U.S. taxpayers who have overseas accounts, income or other foreign assets that have not been previously reported or taxed, called the 2011 Offshore Voluntary Disclosure Initiative, or 2011 OSVDI.

For expats living and banking in Costa Rica, this new initiative applies to “U.S. citizens, [who] are U.S. income tax residents irrespective of where they might reside.” The initiative also says that U.S. citizens with multiple citizenships are also income tax residents, even if they live exclusively overseas. Further, the IRS classifies those who may have foreign accounts or assets subject to U.S. income taxation, where the income from them has not been previously reported, as also subject to U.S. tax law.

The IRS supports the definition of who is a U.S. income tax resident with a Supreme Court ruling from 1924: Cook v. Tait, 65 US 47. This lawsuit involved a U.S. citizen who permanently resided in Mexico City with a Mexican citizen wife. In deciding the case, the court found that the taxation of the U.S. tax resident’s Mexican-sourced income was indeed constitutional. The court’s reasoning was that the U.S. federal government could provide protection and benefits to its citizens living outside the geographic United States. 

The IRS is extremely serious about pursuing offshore accounts and assets as attested to by the following excerpt from IRS Commissioner Doug Schulman’s 2009 testimony before the U.S. Senate Finance Committee, mentioned in a series of articles published by Procopio’s Martin last February.

Schulman suggests the IRS has committed increased efforts and resources to identifying unreported income in foreign accounts: “I am also pleased to be here today to describe the unprecedented focus that the Internal Revenue Service has placed on detecting and bringing to justice those who unlawfully hide assets overseas to avoid paying tax. When the American public is confronted with stories of financial institutions helping U.S. citizens to maintain secret overseas accounts involving sham trusts to improperly avoid U.S. tax, they should be outraged, as I am. But they should also know that the U.S. government is taking new measures, and there is much more in the works.”

Obviously, increased IRS international tax enforcement regarding foreign assets and incomes subject to U.S. law has become a large issue, and the 2011 OSVDI is only one effort by the IRS to enforce its policy of identifying U.S. taxpayers with unreported income in foreign accounts.

The 2011 version of the program follows a well-publicized 2009 initiative, which sought voluntary disclosure of foreign accounts holders. According to an announcement by the IRS commissioner, that effort resulted in over 18,000 U.S. taxpayers participating in the program. 

The 2009 initiative had more favorable terms than the 2011 OSVDI, which includes the requirement that taxpayers are to report any income for the last eight years – 2003 to the most recent tax year, 2010. One can reasonably expect future initiatives to be even less favorable.

The costs under the 2011 OSVDI program are significant, and payment of 25 percent of a total account balance, which has no correlation to any income tax liability or penalties, can be imposed. Be aware that if the 2011 OSVDI does apply to you, unfortunately, U.S. treaties with Costa Rica do not provide any protection for persons seeking to avoid U.S. income taxes. 

One bright note is that the IRS has said that U.S. taxpayers who have no unreported income but have simply failed to file the informational returns, will not be assessed any penalties as long as returns are filed by Aug. 31. 

But read this with caution, it only applies to taxpayers who have NO unreported income. Those who have an ownership in a foreign bank account, foreign corporation, foreign partnership or foreign trust are required to report them.

In summary, the application of the 2011 OSVDI program should be carefully examined for each case. The time frame for participation in the 2011 OSVDI is very short and the terms of the IRS offer are strict, requiring taxpayers to provide extensive and detailed information. Therefore, it is strongly recommended that if you have any questions as to how this law effects you personally, contacting a competent and knowledgeable U.S. tax attorney prior to the August deadline should be a priority.

For more, see: or  0,,id=234900,00.html, or read Patrick Martin’s detailed articles on this issue at: For a list of documents you’ll need for the initiative, see:,,id=235584,00.html.


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