For those U.S. taxpayers who are married to non-residents there is a new form of marriage penalty if the spouses filed joint returns. To be eligible to file joint returns an election must be made with the first joint return in the following manner:
” A declaration that one spouse was a nonresident alien and the other spouse a U.S. citizen or resident alien on the last day of your tax year, and that you choose to be treated as U.S. residents for the entire tax year.”
There is some doubt as to the effect of a joint return filing without the declaration. Once made the choice is effective unless terminated in the following manner:
•Revocation by either spouse
•Death of either spouse
For U.S. taxpayers who are married to non-residents and who file joint returns, the reporting obligations under the Bank Secrecy Act (requirement to file Reports of Foreign Bank and Financial Accounts “FBAR”) and under the Internal Revenue Code, (report worldwide income of both spouses, file Form 8938 , Statement of Specified Foreign Financial Assets and other information returns, such as Forms 3520, 3520-A. and 5471) can be problematic. For the failure to timely and accurately file these returns can result in substantial penalty exposure. Penalties range from criminal prosecution and fines, to significant civil penalties. The range of penalties will depend on whether the conduct was willful or non-willful and whether there was a “reasonable cause” for the non-compliance.
As a result of the Foreign Account Tax Compliance Act (“FATCA”) foreign financial institutions are in a “due diligence phase of scouring their customer account records to determine which of their customers have a U.S. presence. Once the due diligence phase is completed a process of reporting to the IRS, directly or through their host government, will begin. The prospect of discovery of foreign accounts is therefore more likely in the immediate to near future. What discovery and reporting may mean is that taxpayers married to non-residents who filed joint returns may face huge compliance problems if they do not address the issue of joint return liability. For the U.S. taxpayer in this situation the process of ending the election or amending returns with a curative declaration may be worth considering.