Get to know the authorMany of the nine million Americans who live abroad around the world are surprised to discover that they have to file US taxes to report their global income. By the time they realize this though, many are already behind with their US tax filing, often by several years.
The reason that Americans abroad have to file US taxes is that the US taxes all US citizens, regardless of where in the world they live or where their income is sourced. Unfortunately, neither international tax treaties nor whether they pay foreign income taxes in another country prevent expats from having to file US taxes.
Due to international information sharing agreements and a 2010 US law known as FATCA (the Foreign Account Tax Compliance Act), the US can now access Americans’ foreign bank balances and tax information and so see who should be filing.
Fortunately for late filers, the IRS has an amnesty program called the Streamlined Procedure that allows American expats who are behind with their US tax filing from abroad because they didn’t realize that they had to file to catch up.
So how can Americans who are behind catch up using the Streamlined Procedure in 2021?
The Streamlined Procedure in 2021 – no penalties
Americans abroad who catch up using the Streamlined Procedure in 2021 won’t face any IRS penalties for missed filings. This is one of the primary purposes of the program: to allow Americans who weren’t willfully avoiding filing US taxes to catch up without being penalized. It’s important to note though the program is only for those Americans who weren’t aware of or didn’t understand that they have to file from abroad, and it must be entered into voluntarily, meaning that the Streamlined Procedureis no longer available if the IRS has contacted you first.
“The purpose of the Streamlined Foreign Program is to allow foreign residents with U.S. tax status to avoid all penalties by filing now, and avoid being assessed with a potentially larger penalty later” – the IRS
The Streamlined Procedure in 2021 – no back taxes
When American expats catch up with their US tax filing using the Streamlined Procedure in 2021, they can retroactively claim IRS provisions to reduce their US back tax bill, very often to zero, for the years that they missed.
Americans who pay foreign income tax in the foreign country where they live can claim the Foreign Tax Credit by filing Form 1116. The Foreign Tax Credit allows them to claim US tax credits to the same value as the foreign tax that they’ve paid.
For the many expats who pay foreign income tax at a higher rate, this will reduce their US tax bill to zero and give them excess US tax credits that they can carry into years forward.
Another IRS provision for expats is the Foreign Earned Income Exclusion, which lets expats simply exclude the first $107,600 (in 2020) of their earned income from being taxed by the US.
Which provision it’s best to claim depends on each expat’s wider circumstances, such as their income types and levels, and their residence and tax status in their host country, however the majority of expats who catch up using the Streamlined Procedure won’t end up owing Uncle Sam a penny.
How to file under the Streamlined Procedure in 2021
To catch up using the Streamlined Procedure in 2021, Americans abroad must:
– File their last three years’delinquent (or past due)US tax returns
– File their last six years of past due Foreign Bank Account Reports (FBARs, for applicable years)
– File Form 14653 to self-certify that their previous non-compliance with US tax rules was inadvertent
If you’re an American abroad who is behind with your US tax filing, seek advice from a US expat tax specialist today to find out the best way forward given your situation.
