If you are a US citizen living in Italy (or anywhere, for that matter), you remain under the purview of the IRS. That means you still have to file tax declarations in the US.
Italy requires tax residents to file an Italian income tax declaration – even if you don't have income in Italy.
For this reason, almost all Americans living in Italy will end up completing two tax declarations each year.
And one thing to keep in mind is the requirement to declare foreign bank accounts.
Declaring your foreign bank accounts
One of the most common issues for Americans outside the US involves the FBAR (Foreign Bank Account Report), also called FinCEN Form 114. It's a US requirement designed to prevent the use of overseas accounts for illicit financial activity.
Under US rules, individuals must file an FBAR if the combined value of their foreign accounts exceeds $10,000 at any point during the year.
READ ALSO: Five tax mistakes Americans in Italy should avoid
And this obligation goes beyond standard bank accounts. It can also include brokerage accounts, certain private pensions, mutual funds, trusts and joint accounts. Find more details here.
The FBAR has a standard deadline of April 15th each year, but there's an automatic extension to October 15th if you live abroad.
What if you haven't submitted your FBAR in past years?
Mistakes around FBAR compliance due to a lack of awareness – called 'non-willful' – are common. If you failed to declare Italian (or other foreign) financial accounts, there are a couple of ways to make things right with the IRS.
If you paid taxes on your foreign-held income: If you paid taxes on the income held in all your foreign bank accounts and correctly filed your tax return, but simply failed to submit the FBAR, you qualify for the FBAR Delinquency Procedures.
In this procedure, you submit six years' worth of FBARs and explain why you were unaware of the requirement.
If you didn't pay taxes on your foreign-held income or didn't submit a correct tax return, you need to follow the Streamlined Filing Compliance Procedures.
In this procedure, you typically need to submit three years of amended tax returns in addition to six years of FBARs.
Late fees
Whether your FBAR noncompliance was willful or not, there are penalties.
Non-willful violations may result in penalties of up to $16,536 per missed year. However, if you come forward before being contacted by the IRS, and the IRS agrees that your non-compliance was non-willful, they may waive the fees.
Willful violations can trigger far steeper penalties: $100,000 or 50 percent of the highest account balance, calculated per year of non-compliance.
What about declaring US bank accounts to Italy?
Italian tax residents are required to declare bank accounts, including joint accounts, held abroad, including in the US. You do so by completing the foreign earnings and finances section of your annual Italian tax return.
READ ALSO: Do you need to declare a foreign bank account to the Italian taxman?
The requirement doesn’t apply to bank accounts whose balance never exceeded €15,000 at any point during the tax year and whose average balance for the year was below €5,000.
If neither or only one of these conditions is met, the bank account will have to be declared.
What happens if you didn't declare a foreign bank account to Italy?
Failure to declare a foreign bank account when required to do so can result in hefty penalties. Late filing carries a fine of €250 and applies to any declaration submitted within 90 days from the deadline.
You’ll have to submit an ‘amended tax return’ (dichiarazione integrativa), which is essentially a new tax return rectifying the mistakes you made in the previous one.
READ ALSO: What happens if you make a mistake in your Italian tax return?
Luckily, Italy gives you some time to correct your errore – you can submit a dichiarazione integrativa up to December 31st of the fifth year following the year in which the original tax return was filed.
The amended tax return won’t spare you from any penalties related to incorrect filing, but it may significantly decrease them under a procedure known as ravvedimento operoso. You may end up paying only one-ninth or one-eighth of the relevant fine, depending on how quickly you file the amendment.
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