The IRS Created This Program For U.S. Expats Relief From Unfiled Tax Returns
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US Filing Requirements For Expats
It is more onerous to file as an Expat than to file domestically. This is true for many reasons:
- Ex-pats have to report their worldwide income, and this includes converting foreign currency payments into the US dollar at the appropriate rates.
- Ex-pats have to make additional claims to avoid double taxation. This is accomplished by using the Foreign Tax Credit. It allows expats to exclude the first $100,000 of their earned income. The Foreign Earned Income Exclusion is available for ex-pats who do not file foreign taxes, too. There are more ways than expats can claim to reduce their US tax bills sometimes to zero. One example is the Foreign Housing Exclusion. To claim these exclusions, the ex-pat has to file federal tax returns. If they do not, the IRS considers them to owe tax to the US.
- Many expats are obligated to report their foreign bank and investment account and their international business interests by filing an FBAR (Foreign Bank Account Report) on their assets on Form 8938 (if the values exceed minimum reporting standards).
To accommodate expats who have to deal with all these extra filing complications, and to allow expats to file their foreign taxes first (to be able to claim the Foreign Tax Credit with the IRS) expats receive an automatic filing extension until June the 15th, and further extensions can be requested, until October 15th, if required.
Expats Should Get Compliant
Now that the IRS knows where you are when you are and how much you owe, expats can no longer live in the hope that the IRS will never get to them.
The 2010 Foreign Account Tax Compliance Act (FACTA)
What The Act Says
The act compels all foreign banks and financial institutions to report on ex-pats. These institutions are obligated to notify the IRS and provide contact details and balances in the accounts of all American account holders.
So, the IRS has our number!
What The IRS Knows
The IRS knows precisely which ex-pats should be filing from abroad. Foreign banks that trade in US markets and who are non-compliant will face hefty fines in the US. The response internationally was overwhelming, with the vast majority of institutions conforming to these new rules, or refusing to take on American clients any longer to avoid the reporting burden.
What The IRS Is Doing About It
The IRS has been so inundated by information, that it cannot process all the data. That is all that is preventing the IRS from literally contacting every single ex-pat in the ‘whole die world.’ To solve this problem, the IRS is developing new computers and systems to accomplish this.
What It Means For Expats
In the view of the IRS, expats who neglected to file, owe taxes on their worldwide income irrespective of whether they also paid international taxes already.
How The IRS Is Enforcing It
In terms of the law, the IRS can ask Treasury to deny any passport renewals for individuals who owe over $50,000 in US back taxes. Clearly, a massive percentage of expats, even those who do not earn large amounts of income, who neglect to file, would meet this criterion very quickly. Noncompliance will soon result in real-world ramifications for those who remain in the cold.
How Noncompliant Expats Can Catch Up
The Expats That Have To File Back Taxes
Expats That Moved Abroad In The Past Two Years
Those who did not receive a warning letter from the IRS in this regard, but just woke up with the realization that they have to file US taxes from abroad, have fewer problems than all the others. Their non-filing was an innocent error, and all they have to do is to backfile their missing tax returns – and all ends well.
Expats That Moved Abroad More Than Two Years Ago
Those who moved abroad more than two years ago but who discovered their obligation to file from abroad without receiving a letter from the IRS to ask for an explanation of why they had not been filing. It does not matter if these ex-pats missed twenty years of filing, the Streamlined Procedure program was designed for them and is the very best way for them to catch up.
Expats Who Received A Letter From The IRS
Those who found a dreaded envelope with a letter from the IRS in their mailbox thousands of miles away from the hustle and bustle of the US, requesting an explanation for why they had failed to file their tax returns, should respond with calm.
|Immediately consult an ex-pat-specialist CPA – or attorney – to assist you in your response by providing a plan based on the very best path forward.|
Expats Who Ignored The Requirement To File Willingly
Those who were aware of their obligation to file tax returns from abroad, but neglected to file nevertheless. Typically these ex-pats ignored letters from the IRS or willfully avoided their responsibilities by concealing their income or participating in a scheme to hide their offshore accounts and assets from the authorities.
|IMMEDIATELY APPOINT AN EXPERIENCED TAX ATTORNEY THAT CAN ADEQUATELY REPRESENT YOU IN YOUR SUBSEQUENT DEALINGS WITH THE IRS. MOST LIKELY, A NEGOTIATED SETTLEMENT IS STILL POSSIBLE.|
How To Qualify For The Streamlined Procedure
|TO QUALIFY FOR THE STREAMLINED PROCESS|
|1. You must be a US citizen or Green Card Holder:|
|2. You are a resident abroad: The IRS requires that you must have been outside of the US for at least 330 days in at least one of the three years that you are filing the Streamlined Procedure.|
|3. You did not willfully avoid filing:|
|Conduct is non-willful if it is the result of negligence, inadvertence, a mistake, or the result of a bona fide misunderstanding of the requirements of the law.||Willful conduct is the voluntary, intentional violation of a known legal obligation.|
|When the IRS investigates willful conduct, they will consider whether the taxpayer had a financial planner or accountant familiar with US law. If so, the probability is that they knew all about their obligations.|
|Was the taxpayer honest in their communications with their financial planner or accountant relation to their assets and income?|
|Was the taxpayer compliant in their country of residence?|
|What type of investments do they have? Complex structures imply specialist advice.|
|Did they previously file US returns from abroad? If so, they knew they had to.|
|Someone who should have known that they were supposed to file, but remained intentionally ignorant by not asking obvious questions, will be considered by the IRS to show reckless disregard and willful blindness. Someone who has a financial planner will very often not meet the Streamlined Procedure criteria for non-willfulness.|
The Pros And Cons Of The Streamlined Procedure
Those who meet the requirements of the Streamlined Procedure will be allowed to catch-ut with:
- No accuracy-related penalty
- No late filing of information returns penalty
- No late filing of the FBAR penalty
- No late filing penalty
- No late payment penalty
- Ex-pats who owe US taxes after catching-up with their US tax filing will have to pay interest on their back tax payments. Most expats won’t owe anything after they have claimed provisions like the Foreign Tax Credit and the Foreign Earned Income Exclusion.
- The Streamlined Procedure is not an amnesty program. For those who are innocent of wrongdoing, it is a straightforward and penalty-free path to compliance. But, ex-pats are not protected against future scrutiny or even prosecution related to non-compliant years. If evidence of wrongdoing arises later, the IRS can still investigate more deeply into the expat’s historical finances.
- Catching-up with their US tax filing obligations under the Streamlined Procedure, they are simultaneously committed to staying compliant in the future.
How To Use The Streamlined Procedure
|THE STREAMLINED PROCEDURE|
|Taxpayers have to file their last three tax returns along with:||Form 1040||The final three tax returns for which the deadline had already passed.|
|Form 5471||To report foreign-registered corporations|
|Form 8865||Foreign registered partnerships|
|Form 8938||Foreign financial assets|
|Form 3520||Receiving foreign gifts|
|Form 2555||To reduce their US tax bill to claim their Foreign Earned Income Exclusion|
|Form 1116||To reduce their US tax bill to claim their Foreign Tax Credit|
|File the last six FBARs that are due||FinCEN Form 114 (online)||Before October the 15th. File for any year in which they had a combined total of over $10,000 in their foreign-registered financial accounts, along with account numbers and maximum balances during the year.|
|Qualifying financial accounts include:||All bank accounts held outside the US and territories, including at foreign branches of US banks, and including all accounts for which the ex-pat has a signatory authority or control over, even not in their own names, such as business or joint accounts.|
|All investment accounts held outside the US and territories, including at foreign branches of US banks, and including all accounts for which the ex-pat has a signatory authority or control over, even not in their own names, such as business or joint accounts.|
|Penalties for accidentally not filing:||$10,000|
|Penalties for incomplete or inaccurate filings||$10,000|
|The IRS receives verification from international banks, so they can verify reports.|
|Pay all the back taxes outstanding|
|Non-willfulness statement||File Form 14653||In their own words, the ex-pat must explain why they neglected to file their returns.|
|Be honest but concise.|
|Include only relevant details|
|Do not proceed on the path toward the Streamlined Procedure before appointing a very experienced US expat tax specialist. To reiterate, the Streamlined Procedure is not an amnesty program. You are guaranteed no penalties, but there is no guarantee that you will not face future prosecution for any wrongdoing.|
When all the required forms are submitted, most taxpayers will end up owing nothing or have payments owed to them, like Child Tax Credits.
The IRS has access to ex-pat bank balances and foreign tax returns from around the globe. If you are a non-compliant expat, it is only a matter of time before they write to you.
When that happens, it will cost you in the form of late penalties and back taxes. You often cannot get into the Streamlined Procedure after the IRS contacted you.
Due to all the additional rules and requirements, it is tough to pay your US taxes from abroad. You risk severe penalties if you get it wrong. It is precautions to employ the advice and assistance of a US expat tax specialist to ensure that your filing serves your very best short, medium and long term interests.
Digital nomads and ex-pats in countries that do not impose income tax.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
We look forward to helping you get the most benefit from these tax law changes. Please contact us for more information, in FAS CPA & Consultants are ready to assist you with all of your offshore tax matters. You can call us or email at email@example.com and request a free consultation that will answer your most pressing tax questions.
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