Living abroad is an incredible adventure that inevitably broadens our horizons and minds, thanks to the perspective we gain from living in a foreign country and experiencing a new culture.Living abroad is an incredible adventure that inevitably broadens our horizons and minds, thanks to the perspective we gain from living in a foreign country and experiencing a new culture.
American expats still have to file US taxes however, as well as comply with the tax rules in their host country. This is because the US taxes based on citizenship rather than on residence, meaning that American citizens (and green card holders) are required to file US taxes wherever in the world they live, declaring their worldwide income.
Fortunately, there are a number of IRS exemptions that expats can claim to prevent them paying income tax twice on the same income (to both the US and their host country). These include the Foreign Tax Credit, the Foreign Earned Income Exclusion, and the Foreign Housing Credit.
American expats who neglect to file US taxes (and claim the most beneficial exemptions) are at risk of facing a range of IRS penalties though, and may even lose their US passports. The good news is that there’s a way for American expats who are behind with their US tax filing to catch up without facing any penalties using an IRS amnesty program called the Streamlined Procedure.
To catch up with their US tax filing using the Streamlined Procedure, expats must file their last 3 tax returns and last 6 FBARs (Foreign Bank Account Reports, if required), pay any back taxes due (often nil if they claim one or more of the available exemptions), and self-certify that their previous failure to file was non-willful.
Here are the top 3 reasons why expats choose to catch up with their US tax filing using the Streamlined Procedure:
1. To avoid penalties
Around 300,000 foreign banks and 100 foreign governments are now sharing tax and banking information with the US government. While we may not like this new interconnected world, it’s a reality, and it means the IRS now knows which expats should be filing as well as where they live – globally.
If/when it decides to, the IRS can apply retrospective US tax liabilities, including penalties, on expats, and if/when these reach $50,000, the IRS can begin the process of revoking an expat’s US passport.
Clearly it’s far better to avoid this potential scenario by catching up with US tax filing now, especially seeing as most US expats if they claim the available exemptions end up owing nothing, so long as they file before the IRS comes to them.
2. Peace of mind
Peace of mind is arguably the biggest benefit expats gain by catching up with their US tax filing and becoming compliant.
Being behind with tax filing is inevitably a worry. Does the IRS know where I live? (Yes!) Will they get in touch? (Probably, at some point). The peace of mind that goes with knowing that your taxes are in order and you are on the right side of the law is a major factor in many expats’ decision to catch up with their US tax filing.
3. It’s easier than you think
While filing expat taxes is often more complex than filing from in the US, due to having to claim exemptions (and sometimes tax treaty provisions) and the extra filing requirements such as FBAR filing (which is required for expats who have a total of at least $10,000 in foreign bank and other financial accounts at any time during the tax year), expats can seek help with the process from an expat tax specialist firm, and the Streamlined Procedure provides a straightforward opportunity to catch up without facing penalties.
Have a question? Contact Katelynn Minott
Your comments are welcome!
3 comments on “Top 3 Reasons US Expats Should Catch Up With Their IRS Tax Filing Using the Streamlined Procedure”
Thanks for your comments. A few thoughts. Firstly, I think it’s worth being clear that, according to current US law, US citizens who have settled abroad permanently, as well as accidental and dual citizens, are still required to file US taxes. I appreciate that this may seem unfair or illogical, but that is the law. Secondly, the IRS knows who they are, due to banking information provided by almost all foreign banks, and tax information provided by foreign governments. Again, it may not seem fair or right, but it’s the reality. Thirdly, there may be consequences to not filing that it’s worth being aware of, such as financial penalties, not being able to visit the US in the future, or (for those who have and value them) having their US passport revoked. Forthly, no tax treaties the US has with another country contain provisions that protect US citizens abroad from US tax penalties (most treaties in fact, have what’s called a Saving Clause that allows the US to tax its citizens as if the treaty didn’t exist!). Lastly, please note that to renounce US citizenship, you have to certify that you are up to date with your US tax filing, so renouncing isn’t a way to not have to file past returns, only future ones. If we can help with any further clarifications, please get in touch via our website.
A couple of points with respect to your comment:
1. You write:
“Lastly, please note that to renounce US citizenship, you have to certify that you are up to date with your US tax filing, ”
This is not the case. One can renounce without being tax compliant. The effect of not being able to certify tax compliance for the five years would be that one would become a “covered expatriate”. Tax compliance is not a condition precedent to renunciation.
2. You write:
“Forthly, no tax treaties the US has with another country contain provisions that protect US citizens abroad from US tax penalties (most treaties in fact, have what’s called a Saving Clause that allows the US to tax its citizens as if the treaty didn’t exist!)”
Yes, the savings clause does ensure that few treaty benefits are available to U.S. citizens. But the treaties with Canada and some other countries (France, Denmark, Netherlands and Sweden) contain provisions to the effect that those countries will not assist the IRS in enforcing U.S. tax debts on their citizens. I am not suggesting that the treaties nullify the effects of the Internal Revenue Code. But, the treaties do make enforcement much more difficult on Americans abroad. Note also that to enforce these debts, the IRS would be in the politically unpleasant situation of trying to enforce U.S. tax debts on Canadian citizens living in Canada.
Mr. Lesser, let’s say North Korea imposed its citizenship on you and then subjected you to citizenship-based taxation. Would you comply and “get right” with them? Because if you didn’t, you would be a hypocrite with your “the law is the law” rejoinder, or you would be a scumbag tax cheat.
Either way, how much respect would you deserve?
The founders of the United States knew how to reply to the Brits who told them “the law is the law”. Were they wrong, as you imply?
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