Last updated February 6, 2023.
As an expat, your heart may swell with pride when you hear “The Star-Spangled Banner” or watch American athletes compete in Olympic sports. But chances are, you have a less-than-enthused relationship with taxes. And who doesn’t?
Unfortunately, not only are taxes a difficult-to-escape aspect of life, but the United States is one of the only countries in the world to levy taxes based on citizenship.
It doesn’t matter if you’re living off-the-map in Fiji or a C-suite officer for a multinational company in Japan; US-American law requires you to file a tax return every year regardless of which part of the world you call home.
Filing taxes increases in complexity when doing so as an expat. This is largely because the US tax code is complicated as a baseline, but filing as an expat also requires knowledge of the complex filing rules associated with your country of residence. Because the U.S. has independent agreements and relationships with every country, that means there could conceivably be tax filing obligations you unintentionally miss.
Where expats really leave themselves exposed to some unwelcome communication from the IRS is when they do not file for multiple years. In many cases, these American taxpayers simply didn’t know that they were obligated to file. In this case, the IRS has a forgiveness mechanism called the Streamlined Filing Compliance Procedures to help you get caught up with your tax obligations.
What are the Streamlined Filing Compliance Procedures?
Designed as a tax amnesty program, the Streamlined Filing Compliance Procedures allows eligible taxpayers who’ve missed previous tax filing obligations to get caught up.
The exciting thing about the Streamlined Filing Compliance Procedures is that you can file your prior tax returns without paying hefty penalties usually associated with late filings.
To use the Streamlined Procedures, your failure to file your returns must be non-willful. We’ll discuss what that means in depth a little later.
Also, it’s important to note that the Streamlined Filing Compliance Procedures are among four options available for addressing previous failures and omissions of tax filings. The other three are:
- IRS Criminal Investigation Voluntary Disclosure Practice
- Delinquent FBAR submission procedures
- Delinquent international information return submission procedures.
The history and evolution of the Streamlined Filing Compliance Procedures
Before the Streamlined Procedures, expats who failed to file their returns on time could use the Offshore Voluntary Disclosure Program (OVDP). This program was designed for both willful and non-willful violations; there was no amnesty to protect those who had made honest mistakes against penalties or criminal prosecution.
The enactment of FATCA in 2010 and the subsequent IRS enforcement amid initial confusion and uncertainties led to a surge in non-compliance cases, most of which were non-willful.
The IRS recognized there needed to be an easier way for confused taxpayers to become compliant. Thus, the Streamlined Compliance Filing Procedures were enacted in 2012.
Who is required to file US taxes with the IRS?
All US citizens and green card holders must file annual tax returns if their worldwide income meets the annual minimum threshold defined by the IRS. These amounts adjust each year with inflation and are catered to your tax filing status.
|Taxpayer Status||2022 Tax Year|
(the taxes you file in 2023)
|2023 Tax Year|
(the taxes you file in 2024)
|Married, filing separately||$12,950||$13,850|
|Married, filing jointly||$25,900||$27,700|
|Head of household||$19,400||$20,800|
Source: IRS (2022 standard deduction, 2023 standard deduction)
Reading these thresholds, you may assume that if you’re below them, it’s automatically in your best interest to assert your right to not file by foregoing doing so. However, in some cases, it can be financially beneficial to you to file, even if you’re below the threshold. This particularly applies if you expect to get some money from the IRS.
Examples of situations in which you’d likely want to file your tax return, even if you’re below the minimum threshold:
- You had tax withheld from your pay
- You made estimated tax payments
- You qualify to claim refundable tax credits such as the Earned Income Tax Credit
Who qualifies for the Streamlined Procedures?
The Streamlined Filing Procedures do not cover every type of tax return filing default.
To benefit from Streamlined Filing Compliance Procedures…
- You must be able to demonstrate that your failure to file your tax returns was not willful but a result of a mistake or an oversight. For clarity, the IRS categorizes non-willful conduct as conduct that arises due to: a mistake, inadvertence, a good faith misunderstanding of the requirements, or negligence.
- You must not currently be under an IRS civil examination or criminal investigation.
- You must have paid previous penalty assessments related to delinquent or amended returns you filed in the past.
- You must have a valid Taxpayer Identification Number (TIN). This will usually be your Social Security Number (SSN). Note: If you don’t qualify for an SSN, but you qualify for an Individual Tax Identification Number (ITIN), the IRS can consider your case if you include a complete application for an ITIN with your submission for the Streamlined Procedures.
- You must not have met the substantial presence test in any year out of the last three years if you’re not an American citizen or permanent resident.
Additional criteria for taxpayers filing the foreign version of the procedure (Streamlined Foreign Offshore Procedures – more on this to follow)
- You must be an American citizen or permanent resident and not have had a place of residence in the United States for at least one year out of the most recent three.
- You must be an American citizen or permanent resident and must have been outside the United States for at least 330 full days during one of the three tax years you’ll be filing for.
What are the two types of Streamlined Filing Compliance Procedures?
Streamlined Procedures come in two versions:
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
Here’s a summary of the key provisions of each version.
|Streamlined Domestic Offshore Procedures||Streamlined Foreign Offshore Procedures|
|Nature of tax filing default||Non-willful||Non-willful|
|Returns to file||Income tax: Most recent 3 years FBAR: Most recent 6 years||Income tax: Most recent 3 years FBAR: Most recent 6 years|
|Penalties||5% of foreign account balance||None|
|Previous filing of returns||Must have previously filed income tax returns||No requirement|
|Type of tax return||Amended (1040X) only||1040 or 1040X|
|Number of default years||Must not have defaulted in filing returns for each of the previous three years||N/A|
Resources for Accidental Americans
The Streamlined Foreign Offshore Procedures are often associated with US expats: American citizens who moved abroad for a variety of reasons. But it can be a game-changer for Accidental Americans as well.
Who are Accidental Americans?
Accidental Americans is a term that refers to individuals who rarely have, if at all, set foot in the United States but who, according to American law, are American citizens.
Often, these individuals are unaware they are American citizens in the first place, and the information comes to them as a surprise.
An example is a child born to Dutch parents working in Des Moines, Iowa, at the time of birth. But after two years, the family returned to The Netherlands. Because the child was born in the US, they are a US citizen.
The child never returns to the US and never applies for a Social Security number or US passport, but his parents do open a foreign brokerage account for him to begin investing when he’s 18. When opening the account, he must inform the bank of where he was born. Sometime later, the individual receives an email from his US bank requesting his SSN and implying he should file tax returns with the IRS.
Read more about a recent IRS announcement largely concerning accidental Americans: IRS Announces Delay in TIN Requirement
How can an Accidental American make use of the Streamlined Foreign Offshore Procedures?
Our Dutch-American friend has years of outstanding tax returns to file with the IRS and has no idea where to start. The situation is even more alarming when he realizes that he has to pay the taxes due and the associated penalties. And to boot, the bank is threatening to shut down his account if he doesn’t provide them with his SSN within a few months.
In this frustrating scenario, the Streamlined Foreign Offshore Procedures could come in handy. The Accidental American could use the Streamlined Procedures to file their returns without paying penalties for late filing. Alternatively, some people in the scenario described above may elect to renounce their US citizenship, in which case learning about the IRS’ Relief Procedures may be of interest.
Benefits of becoming tax compliant as an American expat
For an expat, the greatest benefit of being tax compliant is peace of mind. While there is never an ideal time to “deal” with taxes, the worst-case scenario is surely when Uncle Sam unexpectedly taps you for returns that you’ve neglected to file for one reason or another. The implications of this unlucky tap can have costly financial implications.
On the other hand, being or becoming tax-compliant means:
- You avoid the risk of hefty IRS penalties associated with late or delinquent filing
- You may not pay taxes, especially if you claim certain expat tax benefits such as the Foreign Earned Income Exclusion or the Foreign Tax Credit
- You may get refunds by using certain tax credits, such as by claiming the Child Tax Credit or, for a limited time, Stimulus Payments
Frequently Asked Questions
What is the difference between willful and non-willful?
Put simply: Willful non-compliance is intentional. In the eyes of the IRS, willful non-compliance is being fully aware of your tax filing obligations and neglecting them nonetheless.
Non-willful default is unpremeditated–usually a genuine slip-up or confusion about your requirements.
What happens if my streamlined filing is rejected?
It rarely happens, but if the IRS rejects your streamlined filing, you may be subject to late filing penalties. That said, the expat tax experts at Bright!Tax confirm they have never seen a rejection through filing thousands of Streamlined Procedures for clients over the years. If you think you may be a candidate for streamlined filing, the team encourages you to reach out so you can get back on track, stress-free.
What forms are needed to complete the Streamlined Filing Compliance Procedures?
- Form 14653, Certification by US Person Residing Outside of the US, to certify that your prior lack of filing was non-willful (Form 4643 under the domestic version of the procedure)
- Form 1040, US Individual Income Tax Return, for each of the three most recent years. In the case of a non-resident alien, Form 1040NR can be filed.
- FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), for the last six years
- If applicable,
Let Bright!Tax reduce the stress of catching up on filing your expat taxes
Taxes inevitably bring up a lot of emotions, and one of the most stressful situations a taxpayer can find themself in is realizing they’re behind on their tax returns owed to the US. In this case, the Streamlined Filing Compliance Procedures is an enormous relief for non-compliant taxpayers. Here is where Bright!Tax would love to step in – with the help of our experienced expat CPAs, we can guide you through the steps necessary to become fully tax compliant.
Contact us today to get started.