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What You Need To Know About Voluntary Disclosure



There are around 9 million Americans living oversees, and the IRS has its sights set on those expats who aren’t up to date with their U.S. tax filing.

All American citizens and green card holders are required to file a U.S. tax return, however because the U.S. is the only developed nation to tax its non-resident citizens, many haven’t realized that they have to file.

Others meanwhile may be aware of the requirement for U.S. expats to file but believe that, because they live overseas, the IRS doesn’t know about their financial circumstances and so isn’t able to enforce the requirement.

The 2010 Foreign Account Tax Compliance Act however (FATCA) imposes fines on foreign financial institutions including banks and investment firms that don’t report their U.S. citizen account holders’ financial details to the IRS. Consequently, the majority of foreign financial firms (currently around 300,000) are providing the IRS with this information. The U.S. also exchanges income tax information with around 100 foreign governments. So the IRS now has most expats’ bank and foreign tax information, and so they know who should be filing a U.S. return.

As well as filing a U.S. tax return, U.S. expats who have a total of over $10,000 at any time during the year in foreign bank or investment accounts are required to file an FBAR (Foreign Bank Account Report).

So expats are also at risk of financial penalties if they’re up to date with their federal tax filing but haven’t been filing FBARs.

Penalties for not filing federal tax returns soon mount up, and if they reach over $50,000, including unpaid taxes and interest, the IRS can revoke expats’ U.S. passports.

Now for the good news

The first good news is that there are a number of exemptions available that can be be claimed that alleviate most U.S. expats from having to pay any U.S. taxes. These exemptions, including the Foreign Tax Credit, the Foreign Earned Income Exclusion, and the Foreign Housing Exclusion, have to be claimed when expats file their federal return. (Which exemptions are most beneficial to claim depends on each expats’ individual circumstances).

It gets better: expats who are behind with their U.S. filing because weren’t aware of either their federal tax and FBAR filing obligations can catch up without facing any penalties under a voluntary disclosure program called the Streamlined Procedure.

The Streamlined Procedure was relaunched in 2014 and is now available to all expats who aren’t willfully dodging their U.S. filing obligations.

To catch up using the Streamlined Procedure, expats must file their last 3 tax returns and last 6 years’ FBARs (if required), pay any back taxes due (in most cases none once they retro-claim the most beneficial exemptions for their situation), and self-certify that their previous non-compliance was non-willful. And that’s it.

What about expats who knew the rules but haven’t been filing?

There is another group of expats who are aware that they should be filing, but haven’t been, perhaps thinking or hoping that the IRS wouldn’t or couldn’t track them down, or that the rules might change. The IRS is probably aware of these expats though (and may in fact already have written to them), and they are at risk of serious consequences, including large fines and even criminal prosecution.

There is another voluntary disclosure program available for these expats though, called the Offshore Voluntary Disclosure Program (OVDP). The OVDP requires that they file their last 8 years of tax returns and FBARs, and pay any back taxes and interest due along with a 20% penalty on what they owe. There may also be a 27.5% penalty applied to their highest offshore balance.

While the OVDP is clearly a more costly voluntary disclosure program, for expats at risk of being prosecuted it does guarantee that they won’t be. The Streamlined Procedure on the other hand is the right option for expats who were genuinely unaware of their U.S. filing obligations. Both voluntary disclosure programs though are golden opportunities for expats to catch up and avoid future fines, and seeing as there is no knowing how long these amnesty programs will be available for, we strongly recommend that expats with outstanding U.S. filing contact an expat tax specialist at the earliest opportunity to discuss their circumstances and strategize a way forward in their best interests.

Hugo Lesser

With clients in over 150 countries, Bright!Tax is a leading provider of US tax services to the estimated 9 million Americans living abroad. I’m responsible for client experience, communications, and branding. Since I joined, turnover has been growing at a rate of 80% per annum.

I excel at surpassing competition by disrupting and transforming the playing field through innovation.

6 comments

  1. User says:

    What needs to be stated is that many of those US citizens abroad are not threatened by the IRS. If they have no US assets or income, have a second citizenship, or live in a country that will not assist with collections, they are protected – the IRS can assess fines and penalties all day long, but they have no means to collect. Their threats are toothless.

    Consequently, for long-term expats, dual citizens or accidental Americans, it’s generally much safer to remain non-compliant and to never enter the US tax system.

    • GhostofWK says:

      That is the situation in Canada. IRS is toothless against Canadian citizens who ran afoul of foreign US tax and reporting laws while they were Canadians living in Canada. Like you say, if you are a Canadian who has never been in the US system or left USA permanently a long time ago and have since stopped filing, it’s probably best to keep it that way.

      And one other suggestion, DON’T VOLUNTARILY DISCLOSE your US person status to any financial institutions that you deal with. That way, you won’t be FATCA’d. Yes, this may involve misrepresenting where you were born to the nice lady at the bank, but since your birthplace is being used to out you to a country you have nothing to do with, then withholding this information (aka lying) is a perfectly moral response to an immoral attack against your rights as a Canadian living in Canada.

  2. GhostofWK says:

    I have no American DNA. Parents are Canadian born and raised, but I was born in the USA while they lived there temporarily, returning HOME to Canada when I was still in diapers, over 50 years ago.

    Which group of ‘expats’ do I belong to?

    Am I really an ‘American living overseas?’

    Should I concern myself with ‘voluntary disclosure’ to a country that has been foreign to me for the half a century or so that I have lived as a taxpaying, law-abiding Canadian citizen outside the borders of the USA?

    What I KNOW about ‘voluntary disclosure’ is that I have nothing to disclose to the USA. ZIP. NADA.

    • User says:

      Don’t identify yourself as a US person when your Canadian bank asks you to fill out a CRS or FATCA form, and you will be fine. They will not validate your answer.

      And even if your accounts were reported, the IRS can’t do a thing about it. You may continue ignoring them.

  3. User says:

    It would be lovely if the author of the original post offered some concrete evidence to explain why continued non-compliance was not the best strategy for most US persons without financial ties to the US…

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