Are you an expat who has left the United States for good? Have you forgotten to file your tax returns and want to file your pending tax returns? Then, this post is just for you as it will help you catch up with US tax returns using the streamlined filing compliance procedure. Millions of American citizens live abroad and many of them are not aware of the fact that it is compulsory for them to file their US taxes and to report their global income no matter where they might live.
American expats are required to file their taxes since the Civil War during which the federal government needed to generate revenue and many landowners had fled to Canada in order to avoid fighting. However, the rule largely remained dormant until the digital age. In the past, the US government was unable to know who lived abroad and how much an American owed. But, technological advancements have allowed the government to snoop on the global finances of expats. Thus, the ancient rule which penalized Americans to file their taxes globally has become more stringent than ever before. This has left many American expats with no option but to file their taxes. However, what if they do not know that they are required to file taxes? Then, what option do American expats have?
The United States is one of the two countries which taxes it citizens globally, the other country being Eretria. Thus, many Americans that live abroad have been breaking the law without even knowing. Many of them owe taxes for many years. Although the IRS has made it easy for American expats to avoid any type of double taxation, they need to file their returns in order to claim exemptions and tax credit.
In the year 2014, the IRS re-launched the streamlined procedure to help expats that were not aware of the requirement to file annual tax returns. The streamlined filing compliance procedure allows American expats to catch up with their tax filing without having to deal with any penalty. Hence, it is easy for expats to catch up with US tax returns.
Tax Filing Requirements for US Expats
Now, it is obvious that US tax filing tends to be more burdensome for expats as compared to US residents. There are a few reasons behind this. First of all, expats have to report all of their global income. This means that they will have to convert foreign currency payments, balances, and income into US dollars using the appropriate rates.
Second of all, American expats will need to claim measures for avoiding double taxation. Foreign tax credit is one of the most commonly used measures. It allows Americans to claim US tax credit for the amount of foreign taxes paid. Another measure is the foreign earned income exclusion. It enables American expats to exclude the first $100,000 earned abroad. Keep in mind that the foreign earned income exclusion measure can also be availed by expats that do not file foreign taxes like expats that live in countries that do not have income tax or for digital nomads. The foreign earned income exclusion measure is a useful provision that will help ensure that you do not end up paying a lot of money on taxes.
There are many other provisions which expats may claim for a reduction in their US tax bill. It is also possible to reduce the tax liability to zero or close. For instance, the foreign housing exclusion can also be utilized. However, in order to claim the exclusion, expats are required to continuously file their federal return or else the IRS would consider that the expat owes US tax.
Moreover, expats will need to report foreign investment and bank account details by filing the foreign bank account report (FBAR) or foreign financial assets by filing the Form 8938 (the forms depend on the values exceeding a certain reporting threshold). American expats also need to disclose their foreign business interests.
In order to provide expats with an ample amount of time to prepare all the documents to file their annual tax return, they are given an automatic extension for filing the extension up to 15th of June every year. Furthermore, expats may file further extension for up to 15th of October online if needed.
Why Expats Must Get & Remain Compliant?
Times have changed. US expats cannot stay out of radar. There is no excuse for not filing their US taxes when abroad because the IRS wants to know how they owe and where they are. Ever since the enactment of the Foreign Account Tax Compliance (FACTA) in the year 2010, all foreign banks and financial institutions are required to provide the US government with account details of American citizens. Thus, all financial institutions including banks have to give all the account holder balance and contact details if they are American. This allows the IRS to exactly know which expats are living abroad and should be filing their US tax returns. The US government is very strict when it comes to making compliance and fines foreign banks that fail to provide the required information. Therefore, if foreign banks want to trade in American money markets, they have to comply. It is due to this reason that just about every foreign financial firm complies with the American government. There are some foreign financial firms which simply refuse to take any American clients in order to avoid the burden of making compliance.
With all this critical information, the only reason why the IRS has not contacted American expats who have failed to file their annual tax returns is the fact that processing all of the data received from foreign financial institutions is difficult. However, the future remains uncertain regarding the IRS contacting expats on its own because it is developing super computers for helping it generate required information.
One thing that US expats have to consider is that the IRS simply considers all expats which do not file their annual return to owe US taxes on worldwide income, regardless of the fact whether foreign taxes had been paid by them or not. There is another US law which has given the IRS the authority to request the US treasury from processing passport renewals of US expats that owe more than $50,000 in US taxes. Thus, it is easy for many expats to fall into this category despite not having a huge income. It is due to this reason that non-filing can become a real-life complication.
How Can Expats Catch Up On Their Taxes?
If you have not filed your US tax returns for some time now, then, there is no need to worry because there is still a way for you to catch up on your taxes. There are four types of expats that must file back their US taxes in order to catch up. The first type of expat is someone who had moved abroad within the last two years and has just discovered that US taxes need to be filed from abroad in a different way. Such expats have the most straightforward process because their non-filing is simply considered to be an innocent error. Hence, they are allowed to simply back file their taxes for the remaining two years so that they can catch up.
The second type of expat is one who has also recently discovered that US taxes need to be filed when living abroad relying on a source that is not an IRS letter. These expats would have missed more than two years of tax filing. They can use the streamlined procedure for catching up.
The third type of expat would have received an IRS letter that requests them for an explanation for not filing their US tax return. Such expats must remain calm and it is in their best interests to consult with an attorney or CPA who is an expat specialist to ensure that they have the best plan of action moving forward.
The fourth type of expat is one that knew of the tax filing requirement but simply did not file. This could be proved by not filing despite having received a letter from the IRS or behaving in such a way which would be construed as willingly avoiding their tax responsibilities such as in the form of concealing offshore assets or accounts by establishing a scheme or concealing income. This group would need to consult with an expert tax attorney for negotiating with the IRS.
How You Can Qualify For the Streamlined Filing Compliance Procedure?
As you have read above, the second type of expat is the best person who can avail the streamlined filing compliance procedure. In order for someone to qualify for the streamlined filing compliance procedure, they need to be a green card holder or US resident living abroad and not having willfully avoided tax filing. Some further clarification is needed for the last two requirements. To be deemed an American expat, the IRS requires one to have lived outside of the United States for a minimum of 330 days a year in the past three years. Thus, they will be allowed to avail the streamlined procedure. The 330 days period is defined as complete 330 complete 24 hour days outside of the United States or its territories. The second requirement is that the expat should not have willfully avoided filing their US tax return. Willful conduct is defined as intentional, voluntary legal duty violation.
Non-willful US taxpayers can use the streamlined filing compliance procedure for catching up with their US tax returns. The IRS will look closely at the evidence to determine willfulness. They would consider the fact if the US expat had hired an accountant or financial planner who knows US tax law as it would mean that the expat already knew about the requirement to file their US tax return. Moreover, the US expat has to prove that he or she was honest in correspondence with the accountant or financial planner regarding the declaration of income and assets.
Willful blindness and reckless disregard are also considered as willfulness. It relates to someone who should have or could have known about their responsibility for filing the tax return. This is why if someone is a financial planner themselves or has a financial planner to not meet the non-willfulness requirement.
Benefits of the Streamlines Procedure
The streamlined filing compliance procedure is beneficial for expats. It ensures that expats do not have to pay penalties for late filing, do not suffer from accuracy-related penalties, and do not have to pay a late penalty for filing of the FBAR. The foreign earned income exclusion and foreign tax credit help ensure that expats do not end up owing much to the IRS. Expats need to bear in mind that once they use the streamlined filing compliance procedure, they will be required to regularly file their tax return.
How to Use the Streamlined Procedure to Catch Up?
The following steps will help expats catch up on their US tax returns using the streamlined filing compliance procedure.
- To file the last 3 tax returns, as well as all the relevant forms include the Form 3520 for having received foreign gifts, Form 8938 for reporting all your foreign financial assets, Form 8865 to report any foreign partnerships, Form 5471 to report foreign corporations, and the Form 1040. In order to reduce your tax liability, you will need to claim foreign earned income exclusion through the Form 2555 and foreign tax credit through the Form 1116.
- To file the last 6 FBARS.
- To pay all US tax owed back which is not that common.
- To file the Form 14653 to verify non-willfulness.
The streamlined filing compliance procedure is extremely useful for US expats that have forgotten or failed to file their US tax returns. However, it is strongly advised that expats should consider hiring a specialist in US expat tax to catch up on their taxes. It is well worth the cost.