More than eight million American expats1 currently live outside the US. And with the rise of digital nomadism, one might expect that number to grow – every day, more Americans are taking the leap to start new adventures overseas.
But a common slip-up that some American expats run into when moving to a new country is neglecting their US tax obligations. Yes, you heard that right: even overseas, you must still file an annual US tax return to the IRS. This slip-up is so common that of the ~8 million Americans overseas, only about 17% are filing US tax returns.
The US is one of the few countries (alongside Eritrea) that applies citizenship-based taxation. US expats must declare their worldwide income and foreign assets to the IRS regardless of where they live.
So what do you do if you’ve been living overseas for some time and have never filed a US tax return (or you’re simply behind)? Does that mean the IRS may penalize you?
Thankfully, this is where the Streamlined Filing Compliance Procedure program comes in.
In this article, we’re going to answer the six most common questions we get from our clients when it comes to understanding the Streamlined Procedure and how it applies to Americans living abroad:
- What is the Streamlined Filing Compliance Procedure?
- Who is eligible for the Streamlined Filing Compliance Procedure?
- How do I file the Streamlined Filing Compliance Procedure?
- What is the IRS standard for willfulness?
- Will I pay penalties when filing the Streamlined Filing Compliance Procedure?
- How long does the Streamlined Filing Compliance Procedure take?
Let’s dive in.
1. What is the Streamlined Filing Compliance Procedure?
Only 17% of Americans living overseas are filing their tax return. Many US expats living abroad aren’t aware of their US tax obligations and, as a result, have never declared their worldwide income or foreign assets.
“Over the past ten years, I’ve spoken to thousands of Americans living outside the US who learned of their IRS tax filing obligation out of sheer coincidence. Some have been informed by their local banks, others by a friend, and in some cases, a news article reveals that they’ve overlooked an important tax responsibility. The recurring theme here is that many people aren’t filing US taxes because they don’t know they have to. It’s not because they don’t want to, or are trying to hide something from US tax authorities.”– Katelynn Minott, Bright!Tax CEO, CPA
The Streamlined Filing Compliance Procedure is an IRS program, originally introduced in September 2012, that helps US expats catch up on their taxes, penalty-free.
2. Who is eligible for the Streamlined Filing Compliance Procedure?
Here’s a quick rundown on the eligibility criteria for the Streamlined Filing Compliance Procedure:
Your tax noncompliance was not willful
You must state under penalty of perjury that your failure to comply with your US tax obligation wasn’t intentional. In other words, your noncompliance was from a mistake or a lack of understanding of your US tax obligations overseas.
The IRS must not have initiated a civil investigation on any of your tax years
If you’ve been under civil investigation (i.e. an audit) from the IRS before for tax evasion, you won’t be eligible for the Streamlined Filing Compliance Procedure.
You have a valid taxpayer identification number
To submit your returns under the Streamlined Filing Compliance Procedure, you’ll need a valid taxpayer identification number (ITIN) or Social Security Number (SSN). For American citizens who have (or are eligible for) an SSN, it is not possible to file the Streamlined Procedure with an ITIN. If you’re not eligible for an ITIN and SSN, then the IRS won’t process your returns under the compliance program.
You haven’t had ‘residency’ in the US for one or more of the three previous tax years
There are two versions of the Streamlined Filing Compliance Procedure: domestic and offshore.
To be eligible for the offshore Streamlined Filing Compliance Procedure, you must certify to the IRS that you haven’t had a place of residence in the US for the last three years. Or, you must have been physically present for 330 days outside the US during one or more of the previous three tax years.
3. How do I file the Streamlined Filing Compliance Procedure?
Though the breakdown feels somewhat simple, there can be a bit of heavy lifting involved in each step. Here’s what you’ll need to submit to the IRS in order to file the Streamlined Filing Compliance Procedure:
Get caught up on your three most recent tax returns
You must file your three previous years of tax returns – again, reporting your worldwide income.
Some forms you might need:
- Form 2555: This is the form you can file to claim the Foreign Earned Income Exclusion (FEIE)2 and reduce your US tax liability. With this form, you can exclude up to $112,000 of your foreign-earned income from your tax return.
- Form 116: You can use this IRS Form to claim the Foreign Tax Credit (FTC)3, another tax relief plan. The FTC allows you to gain tax credits on a dollar-for-dollar basis based on the foreign taxes you’ve already paid.
- Form 8938: Also called the Statement of Specified Foreign Assets4, you’ll have to file this Form if the total value of your foreign financial assets exceeds $300,000 at any point in the tax year ($600,000 if you file jointly).
- Form 8833: The Treaty-Based Return Position Disclosure5 is to claim any benefits from the US tax treaty with your country of residence. Want more information on this to see if your country is eligible? Read more here.
File your FBAR Forms from the six previous years
Typically, US expats only file an FBAR (Foreign Bank Account Report) if the money in their foreign financial accounts exceeds $10,000 at any point in the tax year. However, under the Streamlined Filing Compliance Procedure, you’ll have to file an FBAR for the six previous years.
A signed “Certification by US Person Residing Outside of the US” statement (Form 14653)
With this statement, you confirm to the IRS that:
- You’re eligible for the Streamlined Filing Compliance Procedure
- You filed all of the required FBAR forms
- The failure to not comply with your tax obligations was not intentional.
Read more: How to File Form 14653 | Bright!Tax
4. What is the IRS standard for willfulness?
The IRS considers non-willful noncompliance as any “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.” Again, any behavior that clashes with this standard will disqualify you from the Streamlined Filing Compliance Procedure.
For example, some people are “Accidental Americans,” which was the case for former UK Prime Minister Boris Johnson6. These people may have been born in the United States but left the country very young or had a parent register them abroad with a US consulate. They often have no ties with the US.
Additionally, Accidental Americans are often unaware of their US tax obligations since they’ve spent most of their life overseas. Consequently, the IRS qualifies their behavior as non-willful noncompliance, which makes them eligible for the Streamlined Filing Compliance Procedure.
5. Do I pay penalties with the Streamlined Filing Compliance Procedure?
As mentioned, there’s good (great!) news. The foreign version of the Streamlined Filing Compliance Procedure allows you to catch up on your taxes without paying any penalties.
If you’re behind on your US taxes but qualify for the Streamlined Filing Compliance Procedure, there’s no better time than now to start the program. If the IRS comes to you first, you’ll be ineligible. Under Foreign Account Tax Compliance Act (FATCA)7, countries are under the obligation to report the financial activities of US expats, so it’s best to get started early (read: before the IRS contacts you).
6. How long does the Streamlined Filing Compliance Procedure take?
Typically, it takes the IRS around 90 and 120 days to process your streamlined tax returns. However, due to the backlog caused by the pandemic, the process could take up to a year or longer.
Let Bright!Tax help you catch up on your taxes
Moving overseas to start over in a new country is an exciting opportunity. Filing your taxes? Yeah, not as fun!
Managing your taxes can feel overwhelming, especially when you’re in the process of adapting yourself to a new country.
That’s where we can help. At Bright!Tax, our CPAs help guide our clients through each step of the Streamlined Filing Compliance Procedure and handle all of their tax filings to give them peace of mind. Contact us today to learn more.
- American Expats by Country 2023 (worldpopulationreview.com)
- Foreign Earned Income Exclusion | Internal Revenue Service (irs.gov)
- Foreign Tax Credit | Internal Revenue Service (irs.gov)
- About Form 8938, Statement of Specified Foreign Financial Assets | Internal Revenue Service (irs.gov)
- About Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) | Internal Revenue Service (irs.gov)
- Boris Johnson among record number to renounce American citizenship in 2016 | Boris Johnson | The Guardian
- Foreign Account Tax Compliance Act (FATCA) | Internal Revenue Service (irs.gov)