Streamlined Filing Procedure - Catching Up With US Returns
For many US citizens and Green Card Holders, once they move overseas they don't realize that they still need to file US tax returns.
There are other people living abroad and in the US that have foreign income and foreign accounts which have already been declared overseas and they didn't know they also had to be declared in the US.
If you do need to catch up with your US tax returns, or amend returns and declare foreign income and foreign bank accounts, the IRS has an amnesty - the streamlined filing compliance procedure.
1 - The two types of streamlined filing compliance
The streamlined procedures are available to both US individual taxpayers residing outside the United States and US individual taxpayers residing in the United States.
For individuals living outside the US - the Streamlined Foreign Offshore Procedures
If you are living in the US - the Streamlined Domestic Offshore Procedures
2 - Three parts to catching up or amending while living outside the US
If you are living outside the US and you need to catch up with your US tax returns or amend returns to include foreign bank accounts - you will be using the streamlined foreign offshore procedure.
There are 3 parts to be completed:
US tax returns
Disclosure document to explain why you have not been filing
Foreign bank account reporting
3 - US tax returns to be filed
The IRS asks that the last 3 overdue tax returns are filed. All returns before that which have not been filed will be waived.
On the US tax returns, you report worldwide income - even if that income has already been taxed and declared overseas.
A common mistake is people hear about the foreign earned income exclusion ($107,600 for 2020) and think if their foreign income is under this threshold that they do not need to file. This is not true - the filing thresholds are the same as if you are living in the US and to claim the foreign earned income exclusion you need to file the US tax return and still declare worldwide income.
If you need to file amended tax returns, you will just need to amend the last 3 tax returns.
4 - Disclosure document to explain why you need to catch up
The disclosure document (form 14653) explains the circumstances around why you have not been filing.
The most common reasons that people have are:
they spoke to a friend and then realized they needed to file
reading online and found out that they had to file
received a letter from their bank saying the bank needed to make a report as they were a US citizen and asking if they were up to date on reporting to the IRS
These scenarios are all fine and allowable - the IRS is looking for non-willful conduct. Non-willful conduct is broadly where there is an honest mistake, you didn't realize that you needed to file or you misunderstood the filing requirements.
5 - Foreign bank account reporting
As a US citizen, in addition to your US tax return you also have to make a separate report each year with your foreign bank accounts (FBAR or FinCEN 114).
If you have not been filing FBARs or are behind, you will need to file for the last 6 years. All delinquent FBARs before that are waived under the amnesty.
You will need to report (all outside the US):
bank accounts - including current accounts, savings accounts and Individual Savings Accounts (ISAs - cash and stocks and shares)
investment accounts
pensions
These are for:
accounts in your name
joint accounts
accounts where you are a signatory (e.g. business accounts, your children and if you have power of attorney)
For each account, you will need to report:
the highest (maximum) balance at any time in the year from January to December
the account number
the name on the account
You may also need to report your foreign accounts as part of your federal tax return using form 8938 - this will depend on your filing status and the maximum balance on the accounts for the year.
6 - Penalties
One of the main benefits of the streamlined filing procedure is the IRS waives all failure-to-file penalties, failure-to-pay penalties, accuracy-related penalties, information return penalties and FBAR penalties.
FBAR penalties alone start at $12,921 per account, per year.
7 - Taxes due
If all your income is from outside the US and from a country that has a higher rate of tax than the US, there should be no US federal income taxes due when you catch up.
If you do have income directly from the US - dividends, interest, capital gains, self-employed income, wages, property income - depending on the level of that income, there may be US tax.
If you have high income and you have dividends, interest, capital gains or property income, there is an additional tax, the Net Investment Income Tax (NIIT) that is charged on those sources of income at 3.8% above a certain threshold, depending on your filing status.
8 - Eligibility based on time in the US
To use the streamlined foreign offshore procedure, you need to have a minimum of 1 year out of the last 3 tax years (2017, 2018 and 2019 - January to December) where you spent less than 35 days in the US.
9 - What about the Offshore Voluntary Disclosure Program?
You may have read about the Offshore Voluntary Disclosure Program (OVDP) as an alternative way to catch up.
That program also provided a way for US citizens to catch up with their taxes, but that program is now closed and there are no plans to currently bring it back.
10 - Filing all the documents
There is no specific due date to file all the documents - the IRS just asks for to catch up as quickly as possible once you are aware you need to file.
The 3 tax returns and disclosure document are filed by paper and go to an IRS office that purely deals with streamlined foreign offshore disclosures - the documents are normally processed in 4 to 8 weeks.
The 6 years of FBARs are filed online and confirmation is received in a few minutes.
Summary
After you do catch up, each year you will need to file a US tax return and the FBAR (if the total of all your foreign accounts, including pensions, are $10,000 or more).
The filing deadline for the US return is June 15 when you are living overseas (extended to July 15 for 2020).
The FBAR is due by April 15, although there is an automatic extension to October 15 if you miss the first deadline.
If you have any questions on filing your US tax return as an expatriate, the foreign financial account reporting, or catching up with your US tax returns - feel free to contact us here.