The IRS stepped up its enforcement of America’s citizenship based taxation system requiring all US citizens and green card holders to file US taxes on their worldwide income regardless of where they live. The IRS also realized that it needed to allow Americans living abroad who were not avoiding taxes and did not know these requirements to become compliant without treating them like criminals.
What they came up with is the Streamlined Procedures. Beginning September 1, 2012, the IRS announced this new initiative specifically for American expats who are behind on their required tax filings. This new program allows taxpayers to catch up by filing only the last three years of delinquent expat tax returns, as well as 6 years of Foreign Bank Account Reporting (FBAR) forms. All forms are filed together with a two-page questionnaire and sent to the Department of the Treasury. The amnesty program for the many US expats behind with filing due to not being aware of the rules requiring them to file US taxes from abroad is a huge relief for expats.
Whom it effects:
- The Streamlined Procedure is for anyone behind on filing his or her US taxes.
- The Streamlined Procedure is also suitable for expats who have been filing their taxes, but not FBARs, because they were not aware of the requirement to file.
FBARs (Foreign Bank Account Reports) must be filed by expats who have at least $10,000 in qualifying overseas accounts during the tax year. Penalties for not filing FBARs (or for incorrect or incomplete FBAR filing) are steep, so the Streamlined Procedure offers a way for expats behind on their FBAR filing to catch up while facing no penalties.
To catch up with US tax and FBAR filing using the Streamlined Procedure, expats must:
- File their last three tax returns (as necessary)
- File their last six FBARs (as required)
- Pay any tax and interest due
- Self-certify that their previous failure to file was non-willful.
Regarding the third requirement, to pay any tax and interest due, there are several exemptions available for expats that in most cases cut their US tax liability to zero.
These include the Foreign Earned Income Exclusion, which allows expats who live abroad to exclude the first $102,100 of their earned income from US taxes, and the Foreign Tax Credit, which allows expats to claim a $1 US tax credit for every dollar of equal tax they have already paid in another country.
Two important points though: which exemption(s) to claim to get the most benefit for the expat will depend on each expat’s particular situation. These include country (or countries) lived in and income level and sources. None of the IRS exemptions for expats applies automatically; they have to be claimed when the expat files their tax returns.
Whether an expat’s previous non-compliance was willful or not is sensitive. If the IRS believes for any reason that an expat was willfully avoiding filing or paying taxes, then an expat may still face prosecution in the future. For example, this could happen if the expat moves money between accounts. Since FATCA (the 2010 Foreign Account Tax Compliance Act) came into effect, approximately 300,000 foreign banks and other financial firms are providing the IRS with details about American account holders to including balances, which gives the IRS the ability to catch tax cheats.
For expats unaware of the requirement to file US taxes from abroad, though, the IRS Streamlined Procedure is an excellent opportunity for them to catch up with their US expat tax filing.
If you are a U.S. expat who wants to ensure your taxes are correct or who is behind and looking to catch up, US Expatriate Consultants is here to help. We specialize in the expert preparation of US expat taxes for Americans living abroad. If you would like help catching up on your US tax returns, FATCA, and FBARs please contact us today or click here to get started.