- Determining Your Filing Obligations ›
- Filing and Disclosure Options ›
- Payment and Debt Resolution ›
- Foreign Income and US Expatriate Tax ›
Determining Your Filing Obligations
If you’re a U.S. citizen or permanent resident working in the U.S., you probably need to file a tax return. Here’s when you should file:
Income
Threshold
You must file if your income exceeds the set limits. For example, if you're under 65 and single, you must file if you earned $13,850 or more.
Self-
Employment
Made over $400 from freelance or side jobs? You need to file.
Other
Situations
Certain types of income, special taxes, Marketplace health insurance, the first-time homebuyer credit, and other factors can require you to file a tax return, even if your income is below the usual thresholds.
Even if you don't have to file, it might be worth doing to get a refund. Filing requirements vary if you’re 65 or older or a dependent, so check your specific situation. Unsure if you need to file? Answer a few questions to find out.
Do I need to file a US tax return
This questionnaire is designed to help you, as an expatriate or Accidental American, determine if you must file a U.S. tax return and whether you need to catch up on any past filings.
What to Do If the IRS Says You Must File, But You Disagree
If the IRS notifies you that you need to file a U.S. tax return as an expatriate, but you believe you are not required to, here are the steps you should take:
1.
Review the IRS Notice Carefully
Read the IRS notice thoroughly to understand the specific reason they believe you need to file. It may provide clues or identify specific income or accounts that triggered the filing requirement.
2.
Gather Documentation
Collect all relevant documents, including proof of foreign residency, income statements, tax payments to foreign governments, and any other records that support your position.
3.
Check Your Filing Status and Income
Verify your citizenship or Green Card status and income levels. Ensure you understand the U.S. filing thresholds and requirements, particularly regarding foreign income, assets, and accounts.
4.
Consult a Tax Professional
Before responding to the IRS, we strongly suggest consulting with our team at Bambridge Accountants. As specialists in expatriate tax issues, we can help you assess your situation, determine if you need to file, and guide you through the best way to respond.
5.
Respond to the IRS
Once we have confirmed whether you are required to file according to US tax law, you can respond to the IRS with a formal letter explaining why you believe you are not required to file. Include any supporting documentation.
6.
File a Return if Necessary
If the IRS decides you need to file despite prior judgment, it’s best to do so promptly to avoid further penalties or complications. If eligible, consider using the Streamlined Compliance Filing Procedure to catch up on past obligations.
US Expat Backdated Filing and Disclosure Options
The U.S. taxes its citizens and Green Card holders on worldwide income, requiring annual tax returns, even if you owe no U.S. taxes abroad. Failure to file can result in penalties interest, loss of tax benefits like the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC), and potentially severe legal consequences.
This section will guide you through the various ways to catch up on your U.S. expat taxes
How Many Years of Backdated U.S. Tax Returns Do You Need to File?
This questionnaire is designed to help you, as an expatriate or Accidental American, determine how many years of backdated U.S. tax returns you must file if you've identified that you must catch up on your U.S. tax obligations.
Voluntary Disclosure of Late Returns as a U.S. Expat
The Voluntary Disclosure Program allows U.S. taxpayers to proactively report instances of past noncompliance, such as undisclosed income, assets, or accounts, to the IRS. By providing accurate, timely, and complete information, taxpayers can resolve their tax obligations, including paying any owed taxes, interest, and penalties. While this program doesn't guarantee immunity from prosecution, it may reduce the likelihood of a criminal tax investigation being pursued.
Eligibility
The IRS Voluntary Disclosure Program is available to U.S. taxpayers who want to resolve tax matters related to previously undisclosed income, assets, or accounts due to willful law violations. It applies to individuals, trustees, business entities, and executors. However, it does not cover income from illegal activities, including income from activities legal under state law but illegal under federal law.
To participate in the Voluntary Disclosure Program, follow this two-step process:
1.
Pre Clearance Request
Submit Part I of Form 14457 (Voluntary Disclosure Practice Preclearance Request and Application) to determine your eligibility. This step doesn't guarantee acceptance. You can submit Part I by fax to 844-253-5613 or by mail to IRS Criminal Investigation, Attn: Voluntary Disclosure Coordinator, 2970 Market St., 1-D04-100, Philadelphia, PA 19104.
2.
Full Disclosure
After receiving preclearance confirmation, submit Part II of Form 14457 within 45 days. Extensions of up to 45 days may be granted on a case-by-case basis. The IRS Criminal Investigation (CI) will review your submission and, if approved, will send you a Preliminary Acceptance Letter and forward your case to a civil section of the IRS. An examiner will then contact you to proceed
Voluntary Disclosure vs. Streamlined Procedures
The Voluntary Disclosure Program is intended for taxpayers who have willfully violated tax laws. In contrast, the Streamlined Filing Compliance Procedures are available for those whose failure to file was non-willful. Understanding the difference is crucial to choosing the correct path.
Penalty Considerations
Participating in the Voluntary Disclosure Program may lead to reduced penalties compared to those imposed if the IRS discovers noncompliance independently. However, some penalties will still apply, and taxpayers should be prepared to address them.
No Guarantee of Immunity
While participation may reduce the likelihood of criminal prosecution, it does not guarantee immunity. The IRS evaluates each case individually, and acceptance into the program does not protect against all forms of legal action.
Timing is Critical
The program is generally the most beneficial route if initiated before the IRS discovers the noncompliance. If the IRS begins an investigation before you disclose, you may lose the opportunity to participate in the program.
Streamlined Compliance Filing Procedure
The Streamlined Compliance Filing Procedure is a program the IRS offers to help U.S. taxpayers living abroad who must catch up on their tax filing obligations. This program benefits expatriates unaware of U.S. tax responsibilities who want to comply with minimal penalties.
Eligibility
To be eligible to file under the Streamlined Compliance Filing Procedure, the reason for your failure to file must be non-wilful, and you cannot be under an IRS civil examination or criminal investigation at the time of your submission. Finally, you must have been physically outside the United States for at least 330 full days in one of the last three tax years.
The Two Types of Streamlined Filing Compliance
The Streamlined Filing Compliance Procedures are divided into two distinct types, each designed for different categories of U.S. taxpayers who need to catch up on their tax filings. Here’s an overview of the two types:
1.
Streamlined Foreign Offshore Procedures (SFOP)
Available to U.S. Expats who have lived outside the U.S. for at least 330 full days in one of the last three tax years, thus being classed as a non-resident for tax purposes. Generally, no penalties are imposed on tax returns or FBARs filed under the SFOP. This makes it an attractive option for U.S. expats who want to come into compliance with minimal financial risk.
2.
Streamlined Domestic Offshore Procedures (SDOP)
Available to U.S. taxpayers who live within the United States but have undisclosed foreign income, assets, or accounts and have not met their tax filing obligations due to non-willful conduct. Unlike SFOP, there is no “non-residency” requirement. SDOP imposes a 5% penalty on the highest aggregate balance of your foreign financial assets during the covered period. This penalty is much lower than the potential penalties for willful non-compliance, making SDOP a viable option for residents who need to rectify their tax situation.
To participate in the Streamlined Compliance FIling Procedure, follow this three-step process:
To participate in the Streamlined Compliance Filing Procedure (SCFP), U.S. taxpayers must file overdue tax returns, disclose reasons for non-compliance, and submit FBARs. Here's a detailed guide to these steps, highlighting key differences between the Streamlined Domestic Offshore Procedures (SDOP) and the Streamlined Foreign Offshore Procedures (SFOP).
1.
US Tax Return to be Filed
The IRS requires you to file the last three overdue tax returns. Any earlier unfiled returns will be waived. U.S. tax returns must report worldwide income, even if it has already been taxed or declared overseas. A common misconception is that there's no need to file if foreign income exceeds the foreign-earned income exclusion threshold. This is incorrect—filing thresholds are the same as if you were living in the U.S. You must file a U.S. tax return and report worldwide income to claim the foreign-earned income exclusion. If amendments are needed, only the last three returns must be amended.
2.
Disclose Reasons for Non-Compliance
Taxpayers must submit a certification form explaining their non-compliance with U.S. tax laws, certifying under penalty of perjury that the non-compliance was non-willful—due to negligence, inadvertence, or misunderstanding, not intentional disregard. For SFOP, use Form 14653; for SDOP, use Form 14654.
3.
Submit FBARs (Foreign Bank Account Reports)
As a U.S. citizen, you must file FBARs (FinCEN Form 114) for the past six years if your foreign financial accounts had a combined value exceeding $10,000 at any time during those years. This total includes balances in individual and joint accounts for banks, investments, foreign pensions, trusts, and foreign life insurance or annuity policies. If you have signature authority over a foreign financial account, even without ownership of the assets, it must also be included in the total balance calculation.
Offshore Voluntary Disclosure Program (OVDP)
The Offshore Voluntary Disclosure Program (OVDP) allows US Expats with undisclosed offshore income to resolve tax liabilities and reporting obligations while avoiding criminal prosecution. It provided a standardised penalty structure for those who voluntarily reported non-compliance. The program ended on September 28, 2018.
However, the IRS still offers a general Voluntary Disclosure Program (VDP) covering offshore and domestic disclosures. This program allows taxpayers, including expatriates, to come forward and disclose previously unreported income and assets to avoid more severe penalties or potential criminal prosecution.
For expatriates seeking to resolve past non-compliance, the Streamlined Filing Compliance Procedures may be a more appropriate option if their failure to file was non-willful. If their non-compliance was willful, the general VDP is the current avenue to address such issues.
Amending Previously Filed Returns
If you've discovered errors or omissions in your previously filed U.S. tax returns, correcting them by filing an amended return is essential. You can also amend your return to change your filing status (e.g., from Single to Married Filing Jointly) if it results in a more favourable outcome.
Eligibility
You can amend a return if you need to correct your original filing. Other valid reasons for amending include changing your filing status, reporting new information, claiming missed deductions or credits, or correcting foreign income reporting. Generally, you can amend a return within three years from the original filing date or within two years from the date you paid the tax, whichever is later. Amendments beyond this period are only permitted under specific exceptions, such as bad debts or worthless securities.
To Amend Previously Filed Returns, Follow these three steps:
1.
Check for any errors of omission
If you've found errors or omissions in your U.S. tax returns, correct them by filing amended returns. If foreign accounts are involved, submit FBARs as well.
2.
File Form 1040-X
You can correct their returns using the IRS Form 1040-X, Amended U.S. Individual Income Tax Return. If your original return was filed electronically, you can e-file Form 1040-X for the same tax year. If e-filing is unavailable, you must mail the completed Form 1040-X to the IRS at the address provided in the form’s instructions.
3.
Submit FBARs
As a U.S. citizen, you must file FBARs (FinCEN Form 114) if your foreign financial accounts had a combined value exceeding $10,000 at any time during those years. This total includes balances in individual and joint accounts for banks, investments, foreign pensions, trusts, and foreign life insurance or annuity policies. If you have signature authority over a foreign financial account, even without ownership of the assets, it must also be included in the total balance calculation.
To participate in the Streamlined Compliance FIling Procedure, follow this three-step process:
To participate in the Streamlined Compliance Filing Procedure (SCFP), U.S. taxpayers must file overdue tax returns, disclose reasons for non-compliance, and submit FBARs. Here's a detailed guide to these steps, highlighting key differences between the Streamlined Domestic Offshore Procedures (SDOP) and the Streamlined Foreign Offshore Procedures (SFOP).
1.
US Tax Return to be Filed
The IRS requires you to file the last three overdue tax returns. Any earlier unfiled returns will be waived. U.S. tax returns must report worldwide income, even if it has already been taxed or declared overseas. A common misconception is that there's no need to file if foreign income exceeds the foreign-earned income exclusion threshold. This is incorrect—filing thresholds are the same as if you were living in the U.S. You must file a U.S. tax return and report worldwide income to claim the foreign-earned income exclusion. If amendments are needed, only the last three returns must be amended.
2.
Disclose Reasons for Non-Compliance
Taxpayers must submit a certification form explaining their non-compliance with U.S. tax laws, certifying under penalty of perjury that the non-compliance was non-willful—due to negligence, inadvertence, or misunderstanding, not intentional disregard. For SFOP, use Form 14653; for SDOP, use Form 14654.
3.
Submit FBARs (Foreign Bank Account Reports)
As a U.S. citizen, you must file FBARs (FinCEN Form 114) for the past six years if your foreign financial accounts had a combined value exceeding $10,000 at any time during those years. This total includes balances in individual and joint accounts for banks, investments, foreign pensions, trusts, and foreign life insurance or annuity policies. If you have signature authority over a foreign financial account, even without ownership of the assets, it must also be included in the total balance calculation.
Payment and Debt Resolution for U.S. Expats Catching Up on Taxes
When catching up on taxes, U.S. expats may face outstanding tax debts that must be resolved.
Paying Outstanding Debts
Setting aside a lump sum for potential tax payments prevents interest from accruing and avoids additional penalties. However, if paying in total upfront isn't possible, instalment plans are available as an alternative.
Paying in Instalments
Instalment agreements with the IRS allow you to pay off your debt monthly over a set period. Generally, taxpayers with a debt of up to $50,000 can apply for an instalment agreement online. You may need to work directly with the IRS to set up a payment plan for larger debts. Expats may qualify for a streamlined instalment agreement, which involves minimal paperwork and typically allows you to pay off your debt within 72 months.
Partial Payment Installment Agreement (PPIA)
If you cannot pay the total amount but can make some payments, a PPIA may be an option. This agreement allows you to pay a portion of your debt over time, with the remaining balance potentially being forgiven at the end of the agreement period.
IRS Fresh Start Program
The IRS Fresh Start Program is designed to help taxpayers with unpaid tax debts. It offers several forms of relief, making it easier to pay back taxes and avoid liens and levies. For instance, the Offer in Compromise (OIC) program allows eligible taxpayers to settle their tax debt for less than the total amount owed.
Eligibility
Expats may qualify for the IRS Fresh Start Program if they owe less than $50,000 and meet specific criteria. This program offers benefits like expanded instalment agreements, offers in compromise, and reduced penalties. To qualify for an Offer in Compromise (OIC), you must show that paying the total amount would cause financial hardship or that the IRS may be unable to collect the total amount. The IRS evaluates income, expenses, asset equity, and ability to pay.
Bankruptcy
In some instances, tax debts can be discharged through bankruptcy. However, this is typically a last resort and comes with specific criteria. Bankruptcy laws vary by country, and expats must consider U.S. and local laws when contemplating bankruptcy. Consulting a legal professional with experience in both U.S. and international bankruptcy law is essential.
Eligibility
To discharge tax debts in bankruptcy, the debts must typically be over three years old, with a tax return filed for those debts at least two years before filing for bankruptcy. Additionally, the IRS must have assessed the tax at least 240 days before you file for bankruptcy.
Penalty and Interest Abatement
When U.S. expats catch up on overdue taxes, they may face penalties and interest. The IRS offers a one-time penalty abatement for taxpayers with a clean compliance history, which is especially helpful for expats who previously filed on time but missed a deadline due to unforeseen circumstances.
Reasons for Penalty and Interest Abatement
The IRS may abate penalties if you show that your failure to file or pay was due to reasonable cause, such as severe illness, natural disasters, misunderstanding tax laws, or relying on incorrect advice.
Foreign Income and US Expatriate Tax
As a U.S. citizen or resident, you must report all global income, not just income earned in the United States. Ensure all foreign income sources are accurately reported when catching up on taxes.
Handling Foreign Income and Assets
As a U.S. citizen or resident, you must report all global income, not just income earned in the United States. Ensure all foreign income sources are accurately reported when catching up on taxes.
Eligibility Requirements
To qualify for the FEIE, your tax home must have been in a foreign country, meaning your primary place of work was abroad, with limited ties to the U.S.
Qualifying Tests
Physical Presence Test
You were physically present in a foreign country for at least 330 days within 12 months.
Bona Fide Residence Test
You established and maintained a residence in a foreign country for an uninterrupted period, including a full tax year.
Claiming the Foreign Tax Credit (FTC) When Catching Up on Taxes
The Foreign Tax Credit (FTC) can reduce U.S. tax liability by offsetting taxes paid to a foreign government, avoiding double taxation. You’re eligible if you’ve paid or accrued foreign taxes on income subject to U.S. tax.
Filing Requirements
File Form 1116, Foreign Tax Credit, with your amended U.S. tax returns to claim the FTC based on the foreign taxes paid.
Choosing Between FTC and FEIE
Decide whether to claim the FTC or the Foreign Earned Income Exclusion (FEIE) for each year, as you cannot claim both on the same income. The FTC is usually more beneficial if you’ve paid significant foreign taxes.
Carryback and Carryforward
If you can’t use the full FTC in one year, carry it back one year or forward up to 10 years to offset future U.S. tax liabilities. Strategically allocate unused credits to maximise tax savings.
Addressing FATCA Obligations (Form 8938) When Catching Up on U.S. Taxes
As a U.S. expat catching up on taxes, you may need to file Form 8938 if your foreign financial assets exceed specific thresholds.
Filing Requirements
File Form 8938 with your amended tax returns if your foreign assets exceed $200,000 at year-end or $300,000 at any point during the year (for single or married filing separately).
Catching Up
Ensure you file Form 8938 with your amended returns if you met the FATCA thresholds in any year you’re catching up on to avoid penalties and remain compliant.
Currency Conversion for Retroactive Reporting When Catching Up on U.S. Taxes
When catching up on taxes, U.S. expats must convert all foreign income, taxes, and assets into U.S. dollars using the correct exchange rates.
Conversion Requirements
Use the IRS-approved exchange rate for each tax year, typically the yearly average rate or the rate on the transaction date. Accurately apply these rates when reporting foreign income, taxes paid, and the value of foreign assets on your amended returns.
Judging Investment Value
For foreign investments, determine the value for each year using the appropriate exchange rate for the specific date, such as the end-of-year value or the date of sale, to ensure accurate reporting.
Renouncing U.S. Citizenship as a U.S. Expatriate Catching Up with Taxes
Renouncing U.S. citizenship typically ends the requirement for annual U.S. tax filings and can often reduce your overall tax burden, which is why many expats choose to renounce.
Eligibility
To renounce your citizenship, you must be over 18, mentally competent, and have all tax filings up to date with any outstanding taxes and penalties paid. The decision must be voluntary and legally compliant.
See Renunciation Eligibility DetailsFiling Overdue Tax Returns
To renounce U.S. citizenship, you must certify five years of tax compliance. Using the Streamlined Procedure, you must file five years of tax returns, six years of FBARs, and a final Form 1040 for the renunciation year.
File the Form 8854
To certify that you are entirely up to date with your taxes, you must file Form 8854.
Covered Expatriates and Exit Tax
A "Covered Expatriate" has renounced U.S. citizenship or ended long-term residency and meets specific tax criteria: a net worth exceeding $2 million, high average annual net income tax, or failure to certify tax compliance for the past five years.
Being classified as a Covered Expatriate can lead to several consequences, including an exit tax, tax on deferred compensation, implications for gift and estate taxes, and increased compliance obligations.
