Even if you have no U.S. tax liability, you still must file tax returns. Many American expats often find themselves delinquent on one or more years because they didn’t think they needed to file. They are compliant in their resident country, often paying tax at higher rates than they encountered back home. After a few years, the prospect of catching up may seem daunting and scary.
The IRS provides a way to catch up and avoid the non-filing penalties. The Streamlined Foreign Offshore Procedures are intended for U.S. citizens and Green Card Holders, living abroad who – for whatever reason – have failed to file their U.S. tax returns for the past few years.
Termed “The Procedures,” this is an amnesty program of sorts. It is available to any taxpayer living abroad who can certify that their failure to file a U.S. tax return and pay U.S. taxes for a given year and report their foreign financial accounts, FBARs and FinCEN Form 114, were not a result of willful conduct on their part.
That is, you weren’t trying to avoid paying U.S. taxes; you just didn’t realize you had to.
In a nutshell, the Procedures allow you to catch up on your U.S. tax filing by requiring you to file the previous three years of delinquent tax returns (no matter the last year you filed) and to file the previous six delinquent years of FBARs.
In addition, a Certification form providing a narrative which explains why the expat taxpayer hasn’t filed their tax returns is included in the Procedures filing. It would be unusual for anyone living in a high tax country who has kept current with their resident country’s tax regime to owe anything on their U.S. tax return.
Expats are able to use the Foreign Earned Income exclusion to reduce their U.S. taxable income and apply a Foreign Tax Credit to the remainder (if any) of their U.S. tax on their foreign sourced income. But even if no tax is due, an American living abroad does need to file a U.S. tax return each year.
Let me give you an example:
A U.S. citizen leaves New York at the end of 2016 and moves to Paris, where she starts a French business in which she has more than 50-percent ownership. She files her 2016 U.S. tax return in April of 2017 and works hard to comply with the French tax and regulation regime.
After all, that is where she now lives.
Because French tax rates are generally higher than U.S. rates, she probably wouldn’t owe any U.S. tax, but she is still required to file each year. And, because she is the U.S. owner of a French business, she must include an International Information Return reporting the results of her French business. Unfiled information returns could expose her to a penalty of $10,000, regardless of any tax liability.
The Procedures also provide penalty protection for unfiled FBARs. FBAR penalties can be extremely severe if the taxpayer is found to be willful in not filing. If returns are current but your FBARS are unfiled, there is a separate Procedure for the FBAR delinquency alone.
The bottom line is that delinquencies of U.S. tax filings won’t cure themselves, but self-reporting under one of these Procedures programs will bring you current with the least pain. If you wait for the IRS to discover the delinquency, it may be too late.
About the author:
Doug Ralph is a certified public accountant and an expert in U.S. expat taxation. You can read his blog here.
Doug is based in New Mexico. You can reach him for tax advice at: [email protected].
Read more here on Dispatches about taxes and official requirements for expats.