IRS Streamlined Procedure – What Exactly Does Non-Willful Mean?
The IRS re-introduced the Streamlined Procedure amnesty program in 2014 to help the millions of Americans living abroad who weren’t currently up to date with their US tax filing catch up without facing penalties.
All US expats are required to file a federal tax return each year declaring their worldwide income, regardless of where in the world they live, and some may have to pay some US tax.
They also have to report their foreign assets and bank accounts, subject to minimum value and balance thresholds.
Millions of American expats aren’t aware of their US filing obligations though, and so risk being contacted by the IRS, who can access foreign bank and tax information.
The Streamlined Procedure however allows them to become compliant without facing any fines if they weren’t previously aware of their US filing obligations.
To qualify for the Streamlined Procedure, firstly you have to have been outside the US for 330 days in at least one of the last three tax years.
Secondly, you have to be currently non-compliant, meaning you have failed to file one or more tax returns that you should have (and/or failed to report eligible foreign assets or accounts).
“ Willfulness involves a voluntary, intentional violation of a known legal duty.” – Forbes
Thirdly, your past failure to comply with US expat tax filing requirements has to have been non-willful.
If you qualify, you simply have to file your last three years’ federal tax returns, along with your last six years’ FBARs, self-certify that your past failure to comply was non-willful, and pay any tax that may be due (which for many people is nil if you can claim one or more exemptions).
Let’s take a closer look at what non-willful means.
Am I non-willful?
The IRS defines non-willful conduct as conduct that is “due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” This deliberately puts the legal onus on the declarer to be able to prove that they weren’t aware of the requirements they hadn’t fulfilled.
The IRS checks every Streamlined Procedure non-willfulness self-certification, and the penalties for lying are steep, so how exactly does the IRS interpret non-willful?
The difficulty for declarers can be having to prove the absence of something – willfulness – if the IRS asked them to. One way would be to demonstrate how you did first find out about your unfulfilled obligations and that shortly afterwards you took steps to fulfill them. Difficulties can arise if the IRS sees anything strange in your past banking history, such as evidence of acting secretively, quick and otherwise unexplained movement of assets or cash between countries or accounts, or not providing full information disclosure to banks where you have accounts before you requested the amnesty program, are all going to look suspicious. Likewise with accounts being suddenly opened or closed. So when you find out about the requirement to file, don’t panic, seek expert advice, be honest to banks and governments, and everything will be fine.
The vast majority of expats who are currently non-compliant are honest and sensible, and when they hear that they should be filing US tax returns, they take steps to become compliant. The Streamlined Procedure is a great option for these people, allowing them to catch up without facing any penalties. It’s worth noting that if you have received a letter from a foreign bank inquiring about your US tax status, the clock is ticking, as the bank will report your details to the IRS directly. In this situation, it’s best to seek advice and take steps towards compliance at once, as if the IRS investigates you before you have taken such steps, the Streamlined Procedure, along with other US tax exemption programs for expats such as the Foreign Earned Income Exclusion won’t be available.