Many expats don’t realize that they still are required to file annual Federal Tax Returns to the US long after they’ve moved abroad. In fact, they’ll need to file each year as long as they meet the income threshold and retain their US citizenship. But, there is a way to get caught up without paying stiff penalties that accompany late filings. Using the Streamlined Filing Compliance Procedures can help expats become tax compliant and save money at the same time. Check out our in-depth case study below to learn more about using these procedures.
Meet Ivy Expat!
Ivy Expat decided to move to Japan after graduating from college to teach English as a second language. She loved Japan so much that she decided to stay! Ten years later, Ivy has seen the news of expats in France who are fighting back against FATCA (Foreign Account Tax Compliance Act) and the lingering tax-filing requirement that all American citizens have. It never occurred to her that she still needed to file US taxes, since she lives in Japan and only makes money in Japan.
Ivy makes a salary as a teacher that falls wells below the Foreign Earned Income Exclusion (FEIE), so in all likelihood, she won’t owe US taxes. But that does not negate her requirement to file an information return each year.
Ivy has a foreign bank account where she is saving money for a house with the inheritance she received from her grandmother – this account has $10,000 in it. Her other bank account usually has a small amount of fluctuating income in of it. Since these accounts total more than the threshold of $10,000, she is obligated to file annual FBARs (Foreign Bank Account Reports) to FinCEN (Financial Crimes Enforcement Network) at the US Department of Treasury. Since each non-willful FBAR violation can carry a $10,000 penalty, and she has been accidentally violating this for over five years, she has what the IRS refers to as “seriously delinquent tax debt.”
Seriously delinquent tax debt is debt that tops $52,000. Even though Ivy does not owe taxes, the penalties and fees for not filing have pushed her past the threshold. When this occurs, Ivy should know that her passport is now in jeopardy. Since passports are so integral to expat’s continued ability to live and work abroad, losing her passport could have untold, tragic consequences for her.
What Should Ivy Do?
Since the IRS hasn’t contacted Ivy yet, she can use the Streamlined Filing Compliance Procedures to get caught up on her expat taxes penalty-free. The Streamlined Filing Compliance Procedures are an amnesty program initiated by the IRS to encourage taxpayers to get caught up voluntarily.
To use the Streamlined Filing Compliance Procedures, Ivy will want to gather all the documents necessary for her filing. These documents will include all the information required for filing Federal Tax Returns and FBARs. All pertinent financial information – such as taxes she paid in Japan, real estate transactions, and any income from gifts or inheritance – will be helpful for her report.
Next, she’ll file three years of Federal Tax Returns and six years of FBARs. Due to this stipulation in the Streamlined Filing Compliance Procedures, the program is only available to expats who are several years behind on their taxes. But, when used correctly, the IRS will waive all late filing and FBAR penalties for those whose lack of filing was non-willful. So, she will have to complete Form 14653 (Certification by US Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures) as well, which is an IRS form that certifies all taxes are now up to date and that the expat did not know about the filing requirements. On this form, the IRS requests that you “provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Include the whole story, including favorable and unfavorable facts.” Expats should ensure that all relevant details are included in a one page or less summary to satisfy this requirement.
Finally, Ivy’s going to want to take action as soon as possible. The IRS recently terminated other amnesty programs, and it can end the Streamlined Filing Compliance Procedures at any time, as well. Amnesty programs are never meant to be available forever. If Ivy waits for the IRS to contact her about her noncompliance, she will be ineligible to use these money-saving procedures.
Do You Want to Take Advantage of the Streamlined Filing Compliance Procedures?
Greenback has helped many expats through the anxiety and stress of finding out that they were not tax compliant, and they can help you, too. Get started with Greenback today!