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Can I Sell My Home Subject to a Federal Tax Lien?
Shortly after you fail to comply with an official demand for payment of your tax debt from the IRS, a secret lien attaches to all of your real property and personal property. However, the IRS can also file an official notice of federal tax lien on your home, and other property at the county recorder’s office, which puts the public on notice of the tax lien. This can seriously interfere with your ability to sell your home because any buyer would have to take the home subject to the lien.

However, the IRS will remove the lien—known as a lien discharge—in certain situations. By removing the lien, the IRS is giving up its right to this specific piece of property, which can be assigned a specific monetary value. The IRS will generally only give up this right if it receives something of equal value, or if there is sufficient equity in your other assets to convince the IRS that it will be able to get the money from your other assets.

For example, if you want to sell your home for $400,000, and you owe $300,000 on the first mortgage, the IRS has a lien interest of $100,000 on your home. If you want the IRS to give up this interest, you will have to either give $100,000 in value or show that you have other assets satisfactory to the IRS that will satisfy their claim.

What Happens After I Receive an IRS Notice?
The IRS sends taxpayers millions of notices per year. Whenever you receive correspondence from the IRS you should read it carefully and attempt to understand what the IRS is trying to tell you. This can be difficult because some notices are unclear to those who do are not familiar with tax laws or IRS procedures.

IRS notices can be informational, such as when you are notified that your tax return is going to be adjusted. However, you may still disagree with this notice, and you can attempt to take action to dispute the mistake by the IRS.

Other notices will warn you that the IRS is about to take a specific action. This could a Notice of Intent to Levy, which means that the IRS is about to seize some of your assets, including the funds in your bank account or a state tax refund. Another common notice is the Notice of Deficiency, which states that the IRS is planning to assess a tax liability against you, and gives you one last chance to dispute the amount in Tax Court before the IRS begins to collect it.

When the 50 Percent Penalty Applies During Offshore Voluntary Disclosure
The Offshore Voluntary Disclosure Program (OVDP) normally comes along with an “offshore penalty” equal to 27.5 percent of the highest aggregate account balance of the previously unreported foreign financial assets. However, the penalty is increased to 50 percent for taxpayers who have accounts at foreign financial institutions that are under investigation by the IRS or Department of Justice, or who are cooperating with the U.S. government regarding accounts held by U.S. persons. These foreign financial institutions have been referred to as “bad banks”, and the list of bad banks has continued to grow each year.

How the 50 Percent Penalty Works

Not only does a taxpayer face a 50 percent offshore penalty for any assets held at a bad bank, the taxpayer must pay the 50 percent penalty on all of their unreported foreign assets. For example, a taxpayer with a $10,000 account at a bad bank and $500,000 at a foreign bank that is not under investigation will be subject to the 50 percent penalty on the total of both accounts, despite the fact that the majority of their funds are held at a bank that is not under investigation.

How Does Living Overseas Impact Your FBAR and FATCA Obligations?
U.S. taxpayers who live overseas may still have a Foreign Bank Account Report (FBAR) and form 8938 filing report for their foreign financial accounts. In general, your FBAR obligations will not be impacted by the fact that you live overseas. If you are a U.S. person and your aggregate account balance of foreign accounts exceeded $10,000 during the year, you must file an FBAR, regardless of where you live.

Your Foreign Account Tax Compliance Act (FATCA) obligations using form 8938 require a bit more discussion. Whether you need to file a form 8938 could be impacted by country of residency because there are different threshold amounts depending on whether you live in the U.S. or abroad.

Form 8938 Thresholds for Taxpayers Living Abroad

What is the Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (FATCA) sets reporting requirements for both foreign financial insinuations and U.S. taxpayers who hold specified foreign assets. If your foreign financial institution is in a country that has an agreement with the United States, then you will be asked whether or not you are a U.S. person for tax purposes. Answering “yes” to this question will trigger a requirement on behalf of the financial institution to report your account information to the IRS.

Individual Requirements Under FATCA

By requiring foreign financial institutions to report account information for U.S. taxpayers, the government and the IRS have made it easier to track tax evasion by individuals who are hiding money in foreign bank accounts. In addition, taxpayers must file their own report of their foreign accounts, which is done on form 8938.

What Expats Should Know About Their U.S. Tax Obligations
Expats may decide to leave the U.S. due to work, retirement, or other reasons. Tax reduction may also be a motivation for moving to a foreign country, but the United States uses citizenship-based taxation. Therefore, the taxpayer still has a continuing obligation to file and pay U.S. taxes (although they may be eligible for some exclusions, such as the Foreign Earned Income Exclusion).

Tax Mistakes Expats Should Avoid

First, expats need to continue to file and pay their taxes. Many other countries use territorial-based taxation, which only taxes income earned inside the country. The United States, on the other hand, taxes citizens on all worldwide income.

Are Dual Citizens Required to File FBARs
Dual citizens, along with all other “United States persons”, must file a Report of Foreign Bank Accounts (FBAR) if the aggregate value of their foreign financial accounts exceeds $10,000 at any time during the year. This requirement applies to U.S. citizens, residents, green card holders, and those who must file taxes because they are substantially present in the United States. It also applies to legal entities, including corporations, partnerships, and trusts.

While other countries only tax their citizens on income earned within the country’s borders, the United States taxes its citizens—and other individuals who have a filing requirement—on all worldwide income from any source. This requirement, along with the FBAR filing requirements, can create problems for expatriates, immigrants, and anyone else with offshore bank accounts.

Expats who move abroad are still responsible for complying with U.S. tax law as long as they remain U.S. citizens. Even if you live abroad for the entire year, and none of your income would be taxable, you may still have to file a tax return. If you open a bank account in a foreign country, and the aggregate value of all of your foreign accounts exceeds $10,000 during the year, you must file an FBAR.

What is a “Financial Interest” in a Foreign Accounts for FBAR Purposes
Any United States person with a financial interest in or signature authority over a foreign financial account, where the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the year, must file a Foreign Bank Account Report (FBAR). These terms can be difficult to apply in some situations, and can lead to FBAR compliance issues for those that are unaware that they have a filing requirement.

“Financial Interest” in a Foreign Account

If you are the owner of record for a foreign account, you have a financial interest, even though the account is maintained for the benefit of another person. Spouses are not required to file separate FBARs if all the foreign accounts that the non-filing spouse is required to report are owned jointly with the filing spouse, and filing spouse files an FBAR for all of the accounts, along with an Authorization to Electronically File FBARs.

The Tax Consequences of Inheriting Foreign Assets
U.S. taxpayers who inherit foreign assets must handle the tax consequences of their inheritances with great care. In addition to taxing all worldwide income, the U.S. also includes foreign assets in the gift and estate tax calculation, which determines whether estate tax will be assessed. Heirs who receive foreign assets also have to consider their Foreign Bank Account Report (FBAR) and other foreign account reporting requirements, or risk facing significant penalties.

What Happens When You Inherit a Foreign Account?

If you are a “United States person”—including citizens, permanent residents,(individuals who hold green cards) or must file taxes due to their substantial presence in the United States—you may suddenly have an FBAR filing requirement if you inherit a foreign financial account. If the aggregate of all of your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR.

What Is the Statute of Limitations for FBAR Penalties?
The IRS has six years from the due date of the FBAR to assess the FBAR penalty. In addition, the IRS can assess a separate penalty for each unreported account for each tax year that an FBAR has not been filed, causing the total amount of penalties to add up quickly for some taxpayers.

The current civil FBAR penalties are $12,459 per violation for non-willful violations and the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each willful violation. An individual with five foreign financial accounts who has not filed any required FBARs for the past six years could then face a penalty of over $373,000, and that is assuming that the violations are considered to be non-willful.

These penalties can be reduced in certain cases if the IRS believes that penalty mitigation is appropriate. Taxpayers will no previous history of criminal tax violations who cooperate with IRS examiners may receive reduced penalties. If you need assistance negotiating a reduced FBAR penalty, contact a tax attorney with FBAR experience.

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