IRS Streamlined Procedure – How Can I Catch up on US Expat Back Taxes?
All Americans who earn over around $12,400 (in 2020, or just $400 of self-employment income, or just $5 for Americans married filing separately from a foreigner) are required to file a US federal tax return each year, no matter where in the world they live or where their income was sourced.
This means that the majority of US expats still have to file a US tax return when they live and work abroad.
They may also be liable to pay US taxes, even if they’re paying tax in another country or if a tax treaty exists between the US and the country where they live. This also depends on their individual circumstances and on whether they can claim any exemptions such as the Foreign Earned Income Exclusion or the Foreign Tax Credit.
Many US expats still aren’t aware that they should be filing a US tax return though – no other major country requires its citizens to file if they live and earn abroad after all – so they may owe the US back taxes.
FBAR and FATCA
There are also extra filing requirements for US expats under FBAR and FATCA. FBAR is an acronym for Foreign Bank Account Report. Under the Bank Secrecy Act, Americans must report all their foreign bank, pension, mutual or investment accounts if these accounts (between them) contain a total of a minimum of $10,000 at any time during a tax year.
FATCA meanwhile is the 2010 Foreign Account Tax Compliance Act, which requires Americans living abroad with over $200,000 of foreign assets, not normally including a home, to declare them to the IRS each year.
“Willfulness is shown by your knowledge of reporting requirements and your conscious choice not to comply.” – Forbes
FATCA also compels foreign banks and investment firms to report their American Account holders to the IRS, including account balances. Reporting started in 2016, and around 200,000 foreign financial firms are now complying. This means that the IRS knows a lot about Americans’ accounts and assets overseas, and they can easily check this information against FBAR, FATCA declarations, and tax returns (or note the absence of them).
Penalties for not filing (or not filing fully and correctly) for expats are harsh. FBAR failure to file (or filing incorrectly) penalties start at $10,000 per year, and rise to $100,000 or half the balance of the accounts (whichever is higher) per year if the IRS finds that failure to file was willful, which is to say they think you knew you were supposed to file but didn’t.
Relief is at hand!
The best way to avoid expat tax non-compliance penalties is to file. Filing before the IRS contacts you (possibly as a result of information given them by a foreign bank or investment firm) not only normally lets you avoid penalties, but also gives you the opportunity to claim exclusions such as those mentioned above that can reduce or eliminate your US tax liability.
So if you are a US expat who hasn’t been filing and you may owe US back taxes, we strongly recommend that you consider the Streamlined Procedure.
To claim it, you have to file your last three US tax returns, your last six FBARS (if applicable), pay any back taxes due, and self-certify that your previous non-compliance was non-willful, meaning you weren’t previously aware of your requirement to file.
The Streamlined Procedure, introduced in its current form in 2014, still provides an excellent opportunity for US expats to catch up on back taxes without facing any penaltes. Most US expats can claim one or more exemptions, and won’t owe any US tax anyway. As such, the Streamlined Procedure offers a great insurance policy against future trouble.