How Expats Can Catch Up with US Expat Tax Filing Using the IRS Streamlined Procedure
The IRS Streamlined Procedure was introduced in its current form in mid 2014.
As the IRS stepped up its enforcement of America’s citizenship based taxation system, which requires all US citizens (and green card holders) to file US taxes on their worldwide income wherever in the world they live, it also realized that it needed a way to allow those Americans living abroad who weren’t actively avoiding taxes to become compliant without treating them like criminals.
Who’s it for
The Streamlined Procedure is intended to allow expats who are at least 2 years behind with their US tax filing to catch up.
Is is also appropriate for expats who have been filing their taxes, but not FBARs, again because they weren’t aware of the requirement to file.
FBARs (Foreign Bank Account Reports) must be filed by expats who have at least $10,000 in qualifying overseas accounts at any time during the tax year. Penalties for not filing FBARs (or for incorrect or incomplete FBAR filing) are steep, so the Streamlined Procedure offers a way for expats who are behind in their FBAR filing to catch up, again without facing any penalties.
“The IRS Streamlined Filing Compliance Procedures encourage “non-willful” U.S. taxpayers to come into compliance with their reporting and filing requirements associated with varying interests in foreign financial accounts and assets.”
To catch up with US tax and FBAR filing using the Streamlined Procedure, expats must:
– File their last 3 tax returns (as necessary)
– File their last 6 FBARs (again, as required)
– Pay any tax and interest due
– Self-certify that their previous failure to file was non-willful.
Regarding the third requirement, to pay any tax and interest due, it should be noted that there are several exemptions available for expats that in most cases reduce their US tax liability to zero.
These include the Foreign Earned Income Exclusion, which allows expats who can prove that they live abroad to exclude the first around $100,000 of their earned income from US taxes, and the Foreign Tax Credit, which allows expats to claim a $1 US tax credit for every dollar equivalent of tax that they’ve already paid in another country.
Two important points though: firstly, which exemption (or exemptions) to claim to get the most benefit for the expat will depend on each expat’s particular situation, including which country (or countries) they live in, and their income level and sources, among other things. Secondly, none of these IRS exemptions for expats are applied automatically, which is to say that they have to be claimed when the expat files their tax returns.
The question of whether an expat’s previous non-compliance was willful or not is a sensitive one. If the IRS has any reason to believe that an expat was willfully avoiding filing or paying taxes, then they may still be prosecuted in the future. This could happen if the expat was moving money suspiciously between accounts for example. Since FATCA (the 2010 Foreign Account Tax Compliance Act) came into effect, around 300,000 foreign banks and other financial firms are providing the IRS with details about their American account holders, including balances, directly, giving the IRS the ability to catch out cheats.
For expats who were genuinely unaware of the requirement to file US taxes from abroad though, the IRS Streamlined Procedure is an excellent opportunity for them to catch up with their US expat tax filing.