“You don’t pay taxes - they take taxes.” - Chris Rock
As an American expat, it’s important to file your federal return every year to avoid issues with the IRS. Due to the FATCA law, the IRS can access Americans’ finances and contact details via their banks around the world, so despite being possibly thousands of miles from the USA, you’re never beyond Uncle Sam’s reach.
Some Americans have nevertheless been living abroad but not filing, often because they weren’t aware that they had to file from overseas. Fortunately for these expats, there are some IRS amnesty programs which allow them to catch up, and if they genuinely weren’t aware that they should have been filing, they should avoid all penalties. Some even end up receiving IRS refunds.
It’s important to take advice from an expat tax advisor before attempting to use any of these programs, though. This can’t be stated strongly enough.
In this article [/section], you’ll learn about several different IRS amnesty programs for expats:
• The Voluntary Disclosure Practice
• The Streamlined Procedures
• The Delinquent FBAR Submission Procedures
• The Delinquent International Information Return Submission Procedures
• The Relief Procedures for Certain Former Citizens
• What to do if the IRS writes to you
The Voluntary Disclosure Practice
The Voluntary Disclosure Practice program is for expats who know they should have been filing, but haven’t been. If you know you should be filing but haven’t filed, this is known as ‘willful’ non-filing, and without using the Voluntary Disclosure program, you can be liable to criminal prosecution. This is because unless you file and claim either the Foreign Tax Credit or the Foreign Earned Income Exclusion, the IRS assumes you owe US back taxes on your worldwide income for the years you haven’t filed, even if you’re paying taxes abroad.
The Voluntary Disclosure Practice lets you catch up on your filing without facing criminal penalties, though you will still be liable to civil penalties, which can be substantial, depending on your situation.
Most expats are ‘non-willful’ non-filers though, in which case there is a better program available called the Streamlined Procedures.
The Streamlined Procedures
The Streamlined Procedures is a very useful IRS amnesty program for expats who are more than a couple of years behind with their filing because they weren’t aware of, or didn’t fully understand, their US filing obligations as overseas US citizens.
If you’ve missed three or more years though ‘non-willfully’ (i.e.unintentionally), and the IRS hasn’t contacted you yet, then you may qualify for the Streamlined Procedures.
BOX - The Streamlined Procedures was introduced in its current form in 2014, as a response to the backlash over the 2010 FATCA law. FATCA essentially gave the US government the ability to enforce US tax compliance globally, leaving millions of American expats who hadn’t previously been aware that they should be filing from abroad open to back taxes or even criminal prosecution. The Streamlined Procedures offered these expats a path to compliance without facing any penalties.
The program involves filing your last three federal returns (even if you’ve missed more than three years), and your last up to six FBARs (to report your offshore financial accounts, if applicable), and also file Form 14653 to provide a statement explaining why their failure to file was non-willful.
When you file using the Streamlined Procedures, you can claim the Foreign Tax Credit or the Foreign Earned Income Exclusion for the missed years, which means most expats don’t end up owing any US back taxes. You can also claim any other credits that you’re entitled to, such as the refundable Child Tax Credit for parents, which is how some expats end up receiving a refund when they catch up.
Once accepted, the Streamlined Procedures lets expats avoid IRS penalties entirely.
The Delinquent FBAR Submission Procedures
Some expats have been filing their US tax returns from abroad, but not FBARs, because they weren’t aware of this additional US reporting requirement.
Expats who have over $10,000 in total foreign financial accounts at any time have to file an FBAR. This includes bank, investment, and many foreign pension accounts.
The $10,000 doesn’t apply to one account though, but to your combined foreign financial account balances. This includes any account you have signatory authority over, even if it’s not your account, such as business, joint, and trust accounts. Because it’s not as simple as more than $10,000 in one account, many expats don’t know that they have to file.
For these expats, the Delinquent FBAR Submission Procedures is a way to catch up without paying FBAR penalties, which are very high, starting at $10,000 a year for non-willful cases.
To use the program, you need to file your missed FBARs and provide a statement explaining why you filed late.
The Delinquent International Information Return Submission Procedures
The Delinquent International Information Return Submission Procedures is for expats who are up to date with their filing from abroad, but who wish to amend a past return.
This may be because they realized there was an error, most often in the sense that they failed to file a form they should have and so would otherwise be liable to a significant late filing penalty, such as Forms 5471, 5472, 8865, 8858, or 8938.
The program isn’t available If you have already been contacted by the IRS, or if you are already under investigation.
To use the program, you must file the amended returns, attaching a reasonable cause statement explaining why you’re amending each one
The Relief Procedures for Certain Former Citizens is for ‘Accidental Americans’ - people who are inadvertently American citizens and who wish to renounce their US citizenship.
Accidental Americans are people who have the right to US citizenship but have never used it, such as if you have an American parent, for example, or if you were born in the US but moved abroad permanently as a child.
In this scenario, you are still technically a US citizen and so liable to file US taxes. To renounce your US citizenship though, you have to first be up to date with your US tax filing, creating a Catch 22 situation. The program provides a way around it.
To qualify for the program, you must have a net worth of less than $2 million, and a US tax liability of less than $25,000 per year for the current year and the previous 5 years. You must also provide a statement demonstrating that your previous failure to file was non-willful.
The program exempts you from having to obtain a US social security or tax identification number and file before renouncing your US citizenship.
What to do if the IRS writes to you
The IRS audits around 10% of expats’ tax returns, a much higher proportion than for Americans living in the States. The focus is on higher earners with more complex financial situations. If you receive an IRS notice or letter, don’t panic - and don’t immediately contact the IRS without seeking advice.
The first step you should take is to carefully read the letter or notice, noting the IRS code it contains, as this will indicate what the IRS is writing about and what the possible implications are. You should then liaise with your expat tax preparer. The best course of action may simply be an explanation of an error and an amended return. In more serious cases, it’s best to seek the services of a specialist attorney to help you with your response.
In all scenarios, stay calm, ensure that you understand what is required, seek assistance and plan your response carefully, and respond by the date the letter or notice indicates.
It’s always sensible to keep up with your obligations as a US citizen, and if you fall behind, to catch up voluntarily. Always seek advice to plan the best approach to catching up based on your situation.
If you have any questions, don't hesitate to contact us.
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