American expats sometimes become so engrossed in the incredible experience of living abroad that they forget to fulfill their US tax filing obligations.
Many expats aren’t even aware that they are required to file US taxes from abroad, reporting their worldwide income, often as well as having to file a tax return in the country where they live (depending on their circumstances and the tax rules there).
American expats often have extra US filing requirements too, such as filing an FBAR (Foreign Bank Account Report) to report their foreign based bank and investment accounts.
Following the 2008 financial crisis, the US government passed the Foreign Account Tax Compliance Act, better known as FATCA, to clamp down on offshore tax avoidance.
FATCA compelled Americans to report their overseas financial assets if the total value exceeds certain thresholds, but FATCA also compelled foreign banks and investment firms to report all of their American account holders, along with their balance and contact details, directly to the IRS.
This has given the IRS the ability to know exactly which expats should be filing US taxes and reporting their overseas accounts.
Furthermore, the IRS was later given the power to prevent the renewal of passports for Americans who owe significant US taxes, and the difficulty for many US expats who aren’t filing US taxes is that if they aren’t claiming the exemptions that the IRS has made available for them to avoid double taxation, they are considered to owe US taxes even though they live abroad.
“The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.” – the IRS
Many expats incorrectly assume that a tax treaty automatically prevents them from owing US taxes. For many other expats, it simply doesn’t occur to them that they have to file US taxes from abroad.
American streamline amnesty programs
Thankfully, the IRS has put in place some amnesty programs to allow expats who are behind with their US tax filing to catch up without facing any penalties and, assuming that they claim one or more of the exemptions available to expats when they file, in most cases allowing expats to not pay any US taxes.
In fact, expats who are parents often find they can claim a US tax refund of Child Tax Credits.
The American streamline amnesty program that expats most often use to catch up with their US tax filing is called the Streamlined Procedure.
The Streamlined Procedure requires expats to file their last three federal tax returns, along with up to six FBARs (one for each of any of the last six years in which the combined balances of all their foreign based bank and investment accounts exceeded $10,000).
It’s worth mentioning that there is no additional tax triggered by filing FBARs: it’s simply a reporting requirement.
Furthermore, expats catching up using the Streamlined Procedure are required file form 14653 to self-certify that their previous failure to file wasn’t willful tax avoidance.
The Streamlined Procedure presents an excellent opportunity for expats who are behind with their US tax filing to catch up without facing any repercussions. Expats should catch up at their earliest convenience though, as if the IRS writes to them based on information provided by their bank under FATCA before they catch up, they may not be able to claim the exemptions that prevent them paying US back taxes.