Americans living overseas are often surprised or even shocked to learn that they should have been filing US taxes since they moved abroad. They may have believed that they are protected by a tax treaty, or that because they aren’t a US-resident or because they file foreign taxes abroad, they don’t have to file US taxes. Unfortunately though, none of these is true.
The US has a citizenship-based taxation system, so all US citizens have to file US taxes, wherever they live or earn.
When expats file, they can claim certain credits and exclusions that most often reduce their US tax bill to zero, as long as they file and claim them. If they don’t file on the other hand, they are considered to owe US taxes on their worldwide income, and may be subject to late penalties, too.
There is however a way for Americans living abroad who didn’t realize or understand that they have to file US taxes from overseas to catch up.
What is the Streamlined Foreign Offshore Procedures?
The Streamlined Foreign Offshore Procedures is an IRS program that since 2014 has allowed delinquent Americans who live overseas who meet certain criteria to catch up and avoid penalties and back taxes.
Why catch up using the Streamlined Foreign Offshore Procedures?
“Taxpayers using either the Streamlined Foreign Offshore Procedures will be required to certifythat the failure to report all incomeand submit all required information returns, including FBARs, was due to non-willful conduct.” – the IRS
In the last few years, the US government has developed the ability to access Americans expat’s finances.
In particular, a law called FATCA has provided access to expats’ foreign bank and investment account information, including balance and contact details, while foreign governments are also sharing expats’ taxpayer information.
This means that it’s no longer possible to be ‘off the radar’ of the IRS; sooner or later, they are likely to get in touch. After they do get in touch, it’s no longer possible to use the Streamlined Foreign Offshore Procedures and so avoid back taxes and fines.
Streamlined Foreign Offshore Procedures Requirements
To catch up using the Streamlined Foreign Offshore Procedures, you have to meet certain criteria:
Americans have to maintain a presence abroad to use the program. This means either being a Bona Fide Resident of another country, or spending 330 days outside the US in a 365 day period that is normally the tax year.
Expats also have to self-certify that their previous non-compliance was non-willful, meaning due to ignorance or misunderstanding, and provide a statement to self-certify this.
As already mentioned, the Streamlined Foreign Offshore Procedures program is only available on a voluntary basis, before the IRS contacts you.
3 tax returns
Expats must file their last three past due US Federal tax returns. When you file, you can claim credits and exclusions retroactively, meaning that most expats don’t end up owing any tax, and many in fact receive unexpected refunds of a greater value than the cost of becoming compliant.
If you have only missed one or two tax returns, you can normally back file them without using the Streamlined Foreign Offshore Procedures.
An FBAR is a Foreign Bank Account Report, a reporting requirement with no tax implications, but with big penalty implications for those who don’t file.
Americans have to file an FBAR if they have, in total, over $10,000 in their foreign bank and investment accounts at any time in a year.
As part of the Streamlined Foreign Offshore Procedures program, you have to file FBARs for any of the last 6 years in which your combined foreign account balances exceeded the threshold.
Finally, the program requires you to keep filing in subsequent years after having gotten caught up.
How to get started with the Streamlined Foreign Offshore Procedures
All expats’ situations are different, and it’s important to seek guidance from an expat tax specialist before filing, to ensure that the Streamlined Foreign Offshore Procedures is the best path to compliance for you and, if it is, to ensure you file in your optimum interests.