US Expat’s Guide to Streamlined Filing Compliance Procedure: 6 Frequently Asked Q&A’s

A common slip-up that some American expats run into when moving to a new country is overlooking their US tax obligations. Yes, you read that right: even overseas, you must still file an annual US tax return to the IRS.

In 2022, US expats worldwide filed around 1,821,583 tax returns. Other data indicates that many expats still failed to do so.

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 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:

1. What is the Streamlined Filing Compliance Procedure? 
2. Who is eligible for the Streamlined Filing Compliance Procedure? 
3. How do I file the Streamlined Filing Compliance Procedure?
4. What is the IRS standard for willfulness? 
5. Will I pay penalties when filing the Streamlined Filing Compliance Procedure? 
6. How long does the Streamlined Filing Compliance Procedure take? 

Let’s dive in.

1. What is the Streamlined Filing Compliance Procedure?

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 a program, originally introduced by the IRS  in September 2012, that helps US expats catch up on their taxes, penalty-free.

By providing an approachable way for non-compliant taxpayers to come forward and rectify their tax obligations, the program encourages taxpayers into compliance with U.S. tax laws.

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 a result of a mistake or a lack of understanding of your US tax obligations overseas. 

The IRS must not have initiated a civil investigation on any tax year

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 (also called Streamlined Foreign Offshore Procedures – SFOP), 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?

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 delinquent, or past due, years of tax returns – again, reporting your worldwide income. Let’s say you’re filing a Streamlined Procedure in March 2024. Because your 2023 tax return isn’t due yet, filing a Streamlined Procedure will mean filing the 2020, 2021 & 2022 tax returns under the Streamlined Procedure.  

Some forms you might need to complete as part of your tax return include:

• Form 2555: With this form you can claim the Foreign Earned Income Exclusion (FEIE) and reduce your US tax liability by reducing your taxable income. With this form, you can exclude up to $112,000 of your foreign-earned income from your tax return if you qualify for the Bona Fide Residence or Physical Presence test.  
• Form 1116: Use this IRS Form to claim the Foreign Tax Credit (FTC), another tax savings tool. The FTC allows you to claim tax credits on a dollar-for-dollar basis based on the foreign taxes you’ve already paid in foreign-source income.  
• Form 8938: Also called the Statement of Specified Foreign Assets, Form 8938 is required if the total value of your foreign financial assets exceeds $300,000 at any point in the tax year (Thresholds vary depending on filing status and whether you reside in the US or abroad.). 
• Form 8833: The Treaty-Based Return Position Disclosure5 is used to highlight to the IRS any benefits from a tax treaty that you are utilizing on your tax return.

Want to see if your country of residence has a tax treaty? We have a complete list of these countries that will come in handy.

File your FBAR Forms from the six previous years

Typically, US expats only file an FBAR (Foreign Bank Account Report) if their foreign financial account balances exceed $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 willful.

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 conflicts with this standard will disqualify you from the Streamlined Filing Compliance Procedure. 

A common example of non willfulness is illustrated by “Accidental Americans,” a term used for US citizens who are born in the United States but left the country at a very young age or who had a parent register them abroad with a US consulate. They often have no ties with the US. A news-making case was that of former UK Prime Minister Boris Johnson.

Accidental Americans are often unaware of their US tax obligations since they’ve spent most of their life overseas. Consequently, the IRS generally qualifies their behavior as non-willful noncompliance, making them great candidates for the Streamlined Filing Compliance Procedure. 

5. Do I pay penalties with the Streamlined Filing Compliance Procedure?

Once you understand that you have to catch up on your US taxes from abroad, it’s not all bad news. The offshore 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 and qualify for the Streamlined Filing Compliance Procedure, there’s no better time than now to start the procedure. If the IRS comes to you first, you’ll be ineligible. Under Foreign Account Tax Compliance Act (FATCA), countries are under agreement to report the financial activities of US expats back to the IRS, so it’s best to get started early (emphasis: before the IRS contacts you). 

6. How long does the Streamlined Filing Compliance Procedure take?

Once you’ve mailed your Streamlined Procedure to the IRS it typically 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.

Taxpayers should be prepared for these potential delays and plan accordingly when participating in the Streamlined Filing Compliance Procedure. That said, as soon as your tax returns are placed in the mail, you are considered to be compliant with your IRS reporting obligations, and can breathe a sigh of relief.

We recommend staying informed about updates or changes to IRS operations that may affect processing times and to communicate with tax professionals familiar with the Streamlined Procedure for guidance. By being proactive and patient, you can navigate the SFCP effectively and ensure penalty-free compliance with your US tax obligations.

References

1. American Expats by Country 2023 (worldpopulationreview.com)
2. Foreign Earned Income Exclusion | Internal Revenue Service (irs.gov)
3. Foreign Tax Credit | Internal Revenue Service (irs.gov)
4. About Form 8938, Statement of Specified Foreign Financial Assets | Internal Revenue Service (irs.gov)
5. About Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) | Internal Revenue Service (irs.gov)
6. Foreign Account Tax Compliance Act (FATCA) | Internal Revenue Service (irs.gov)