Of the over 9 million Americans living overseas, many still aren’t aware that they have to file US taxes, despite living abroad, and reporting their worldwide income.
The IRS has several amnesty programs available for these expats, depending on their circumstances. Two of the most important of these are the Voluntary Disclosure Practice, and the Streamlined Procedure.
The Voluntary Disclosure Practice
The Voluntary Disclosure Practice replaced both the Domestic and Offshore Voluntary Disclosure Programs in late 2018.
The old and new versions are similar in that they are intended for Americans who are behind with their US tax filing and/or FBAR (foreign account) reporting and who believe that their non-compliance may be interpreted by the IRS as willful avoidance.
The program lets them catch up and become compliant without facing criminal penalties, although they still have to pay any tax, interest, and IRS penalties that may be due.
While the old Offshore Voluntary Disclosure Program required expats to file their last eight years’ of federal tax returns and FBARs, the new Voluntary Disclosure Practice requires just six, although it grants the IRS the power to look back further if it deems it necessary. The IRS also gained further discretionary power, including the ability to impose higher penalties.
The ‘voluntary’ part of the Voluntary Disclosure Practice is worth emphasizing, as expats who wait for the IRS to write to them rather than seeking compliance voluntarily may not be eligible for the amnesty. This is also true for all the IRS amnesty programs.
“You have a legal duty to fully comply with U.S. tax laws. Voluntary compliance is the cornerstone of our tax system. While most taxpayers voluntarily comply with their obligations, some fail to do so.” – the IRS
The Streamlined Procedure
The Streamlined Procedure in its current form was introduced in 2014 to let expats who are non-willfully non-compliant catch up without facing penalties.
It provides a smooth and easy path to compliance for the many expats who haven’t been filing US taxes (and FBARs) because they didn’t know that Americans have to file from abroad.
To qualify, expats have to file their last three federal tax returns, and their last six FBARs (for any year that they qualify), and also provide a signed statement explaining why they hadn’t filed before.
When expats file from abroad, they can claim certain IRS provisions such as the Foreign Tax Credit and the Foreign Earned Income Exclusion to reduce their US tax bill, often to zero. These have to be claimed though as part of federal tax filing, so filing is typically much more cost effective than not
The Streamlined Procedure is a great opportunity for the majority of expats who are behind with their US filing, as most expats haven’t been willfully avoiding their responsibilities (by for example trying to conceal foreign accounts or transactions).
There’s no guarantee that the program will stay open indefinitely, so expats who are behind should take steps to become compliant at the earliest opportunity, and certainly before the IRS contacts them, after which the Streamlined Procedure amnesty benefits are not normally available.
Other IRS Amnesty Programs
There are a couple of other IRS amnesty programs for certain expats: the Delinquent FBAR Return Procedures, for expats who have been filing their federal returns but who weren’t aware of their FBAR filing responsibility; and the Amended Return Procedures, for expats who need to amend a previously filed return.
We strongly recommend that expats who are behind with their US tax filing seek expert advice as soon as possible to ensure that they take the correct and most beneficial route to compliance based on their circumstances.