With the passing of the US expat tax deadline last month, comes the countless expats living in the UK left another year behind on their US tax filing requirements.
Every year, thousands of Americans in the UK fail to meet their US tax obligations due to a variety of reasons. The Foreign Account Tax Compliance Act (FATCA) was introduced in 2010 and granted the IRS with the permissions to force banks worldwide to reveal the identity, accounts and investment income of Americans abroad. AS a result of the introduction of FATCA and other compliance acts, banks around the world are actively scrutinizing on client’s accounts in an effort to remain compliant with US tax law.
If you were born in the United States, own a US green card or have US income you fall into the IRS’s long arm. Therefore, it is more than likely that you are required to file a US tax return, alongside other relevant tax documents (i.e. FBAR).
It is important that as soon as you realize you are not meeting your US tax obligations you work to get on track. Failing to get on track in a timely manner can result in severe penalties and much unnecessary stress.
US citizen abroad who has never filed a tax return
The IRS recognizes that a large portion of those abroad who fail to file their US tax returns is due a lack of knowledge surrounding their US tax filing obligations. For this reason, amnesty programs, such as The Streamlined Filing Procedure, has been introduced. These programs allow the IRS to waive penalties for expats where reasonable.
The IRS regards a reasonable explanation for failing to remain compliant as a reason that is non-willful; i.e. due to negligence or mistake.
In order to qualify to file under the Streamlined Foreign Offshore Program you must meet the following criteria:
• You have spent 330 days in at least one of the last three years outside of the United States
• You are currently non-compliant
• Your failure to comply was a non-willful violation
Under the Streamlined Procedure, you will be required to file last 3 years of federal tax returns and 6 years of FBARS and pay a tax due.
US citizen abroad who have failed to file their return on time
If you have failed to file your US tax return on time there are two potential penalties you may face from the IRS: failure-to-pay and failure-to-file.
Failure to File Penalty
A failure to file penalty applies to those who did not file by the tax-filing deadline. If you have filed late, but within 60 days of your returns deadline date, your penalty will generally equal 5% of the amount tax unpaid. This amount is applied for every month the return is late, but the penalty cannot exceed 25%. The minimum penalty for filing more than 60 days past the filing or extension deadline is 100% of the unpaid amount or $135 (whichever is smaller).
Failure to Pay
A failure to pay is applicable to those who did not pay all tax owed to the IRS by the filing deadline. This penalty is charged at a monthly rate of 0.5% of your actual perceived tax liability (cannot exceed 25%). If you file an extension and pay at least 90% of your owed taxes by the deadline you can avoid this penalty.
There are a number of much harsher and more serious penalties that you can be subject to due to non-compliance, such as FBAR penalties. Failure to file an FBAR can result in one of two civil penalties: Willfulness penalty or Non-willfulness penalty.
A non-willfulness penalty is limited to $10,000 and may be imposed on any person who violated their FBAR tax filing obligations, which includes insufficient record-keeping standards.
A willfulness penalty is limited to $100,000 or 50% of the balance in the account at the time of the violation. This can be imposed on any person who willfully fails to file their FBAR.
Passport Revocation Law
The IRS has reserved the right to revoke the passport of any U.S. citizen who owed more than $50,000 to the IRS.
If you continually ignore your U.S. tax obligations, the IRS has the power to file a notice of a federal tax lien, seize your property, make your forfeit your refund and file charges for tax evasion, on top of the other penalties discussed.
Bambridge Accountants, a specialist firm in US expat tax, recommends that as soon as you suspect you are not inline with any US tax obligations you contact a US tax specialist for advice.
‘We do not advise waiting for the IRS to request you to file a tax return or FBAR. If the IRS or U.S. Department of Treasury catch you failing to comply penalties can be much harsher than if you file under your own accord.’