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US expats need to file US taxes no matter where they live. Moreover, the IRS plans to spend a large part of its $80 billion budget increase on enforcement, meaning fewer taxpayers will slip through the cracks, and increased frustration for expat taxpayers is likely on the horizon. Fortunately, there may be an IRS amnesty program to help you get caught up.
And yet – it’s understandably easy to fall behind. A lack of awareness or general forgetfulness can all lead to an unwelcome IRS notice in the mail. Fortunately, there is a silver lining here: the IRS offers numerous amnesty programs to help taxpayers become compliant. However, it’s in expats’ best financial interests to take that first step before the IRS reaches out, and we’ll discuss why in more detail below.
What is tax amnesty and its advantage?
The IRS offers several tax amnesty options for taxpayers owing back taxes. These programs encourage taxpayers to regain compliance and return to the good graces of the IRS while minimizing penalties and interest.
Some of the tax amnesty options available from the IRS include:
- The Fresh Start Initiative
- Installment Agreements to pay off the debt over time
- Offers in Compromise
- Penalty Abatement
- IRS Criminal Investigation Voluntary Disclosure Practice (previously known as the Offshore Voluntary Disclosure Program – more on this in the FAQ section below)
- Streamlined Filing Compliance Procedures (SLP)*
*You do need to be proactive to take maximum advantage of these tax amnesty programs. To highlight this, the SLP is not an option for taxpayers contacted by the IRS before initiating the process of becoming tax compliant.
More broadly, it is important to address noncompliance swiftly, as the potential headaches and consequences can be far-reaching.
Potential consequences of not filing US tax returns as an expat
Failing to file a tax return with the IRS may not always trigger an immediate response from the agency. In fact, the IRS may be so slow to reach out that years may go by before you even learn of your obligation to file. This knowledge understandably triggers a lot of stress around the need to catch up and ensure the returns are filed correctly – all while feeling like a notice from the IRS is looming.
That said, it is actually beneficial for the taxpayer to realize their mistake and proactively seek to correct it before the IRS contacts them. If you decide to roll the dice and carry on not filing until the IRS contacts you, certain amnesty programs become unavailable to you. Moreover, the IRS may take a range of administrative and legal actions when evaluating your non-compliance.
Accrued interest and penalties on late tax payments
These can be compounded by currency exchange rates and banking fees when transferring funds from foreign banks.
Loss of eligibility for tax refunds
Particularly problematic and disappointing for expats who are paying foreign taxes and may be eligible for refundable tax credits, including the Child Tax Credit or COVID stimulus payments. .
Increased risk of audits and investigations by the IRS
The agency may view expats as more likely to underreport income or assets. The National Taxpayer Advocate 2022 Annual Report to Congress highlights this risk: over $45 billion are appropriated for enforcement, with a paltry (by comparison) $3.2 billion allotted for taxpayer services.
Limitations on travel
Tax compliance status can affect these rights and may result in difficulty obtaining or renewing travel documents. For example, any taxpayer who owes more than $50,000 to the IRS is ineligible to renew their passport.
Potential difficulty in obtaining loans or credit cards
Further complicated by the fact that foreign banks may be less familiar with US tax regulations and may be hesitant to lend to expats who are not in full compliance. In fact, lenders are known to ask for recent US tax returns when applying for a mortgage.
Passport revocation
Under the Fixing America’s Surface Transportation (FAST) Act, the IRS can revoke or restrict your passport, especially if you owe the IRS more than $59,000. This amount is adjusted for inflation each year.
Challenges sponsoring family members for permanent residency
Sponsoring family members for permanent residency requires that the sponsor be in good standing with the IRS.
IRS notice letter
Whenever it comes to the IRS’ attention that there may be cause to contact a taxpayer, outreach typically first occurs via a letter sent by mail.
Difficulties with renouncing US citizenship and Green Card relinquishment
As part of the process of renouncing US citizenship, you must be able to demonstrate that you have filed your past five tax returns. Additionally, you are required to file a final one before officiating the renunciation procedure.
The IRS is always looking for an amicable settlement to save time for the taxpayer and itself. That’s why it has several tax amnesty programs.
Are You Eligible for the Streamlined Filing Compliance Procedures?
While it is not the only tax amnesty program, the Streamlined Filing Compliance Procedures are the most comprehensive and popular for US expats.
The Streamlined Procedures come in two versions: the domestic version and the offshore version. The latter is specifically designed for American expats living abroad.
How to determine your eligibility for the Streamlined Foreign Offshore Filing Procedures, usually filed with Form 14653.
- Your failure to file tax returns must be non-willful. The IRS considers a non-willful failure as “due to negligence, inadvertence, or mistake or conduct that is the result of good faith.”
- You should not be under an IRS tax audit. If the IRS has already commenced an audit or examination of your tax records, you’re disqualified from using the Streamlined Procedures.
- You must have an SSN or an ITIN (Individual Taxpayer Identification Number). When filing under the streamlined program, you can apply for an ITIN if you don’t have one.
- You must meet the applicable non-residency requirement. That means living outside the US for at least 330 full days in one or more of the three most recent tax years.
FBAR filing
While you may need a complete expat tax guide to know all the tax filings you need to make, one of these is the FBAR which applies to those with bank accounts with total values exceeding $10,000 at any time during the tax year.
As part of the Streamlined Procedures, you’ll need to file FBARs for the six most recent tax years.
What is FATCA?
Along with FBAR filings, you may need to also comply with FATCA regulations if your foreign financial assets exceed $200,000 on the last day of the tax year or over $300,000 at any point during the tax year. (These thresholds are lower for those who reside in the US).
And when using the Streamlined Procedures, you must report your foreign financial assets on Form 8938 for the last three tax years.
Reporting foreign financial accounts
The FBAR is filed via Form FinCEN 114 on the same date as your annual tax return deadline.
FATCA is reported with Form 8938, known as Statement of Specified Foreign Financial Assets, by your tax return due date.
Note: while FinCEN 114 is reported to the US Treasury Department’s Financial Crimes and Enforcement Network, Form 8938 is reported to the IRS.
Relief Procedures for Certain Former Citizens
If you’re planning to surrender your US citizenship or Green Card, you may be able to avoid the punitive “exit tax” imposed on certain former citizens. To qualify:
- You must have expatriated after June 17, 2008.
- At the time of expatriation, your net worth should be less than $2 million.
- Your average annual net income tax liability for the five years before your expatriation date should be less than $178,000.
- You must have filed all your tax returns for the five years preceding your expatriation date.
Navigate IRS tax amnesty programs with confidence
If you plan to expatriate in the next few years, it’s best to start planning today to reduce the chances of any last-minute tax surprises. Bright!Tax are US expat tax experts committed to providing our clients with personalized expert service.
References
- IRS Unveils Strategic Operating Plan; ambitious effort details a decade of change
- 2022 Annual Report to Congress – Taxpayer Advocate Service
- Fixing America’s Surface Transportation Act (FAST Act) – FHWA Operations
- About Form 8938, Statement of Specified Foreign Financial Assets | Internal Revenue Service
- Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service
- IRS Criminal Investigation Voluntary Disclosure Practice | Internal Revenue Service
