The United States is unusual as its citizens remain subject to US tax law even if they are living and working outside the US. They may therefore have to file a Federal Tax Return even though they have no US income and live and work outside the United States. Furthermore, if you were born in the US to non-US parents you will be a US citizen.
Common reasons for US citizens believing that they are not required to file a Federal Tax Return:
- Their earnings are less than the annual foreign earned income exclusion ($101,300 for 2016)
- Although born in the US they do not have a US passport or have never used their US passport.
- They have a US parent but have never lived in the US.
- They pay tax on all their income in the UK.
All these arguments are misplaced, the $101,300 exclusion has to be claimed on a Federal Tax Return; not owning or using a US passport, or never living in the US, does not indicate that you are not a US citizen, etc, etc….
However, these and other views do prevail in a lot of cases, and there are large numbers of US citizens who are not filing Federal Tax Returns where they do have a filing obligation. The IRS realise this and have provided opportunities for individuals who have not been filing their Tax Returns, due to bad advice or a misunderstanding of the rules, to bring their tax affairs up to date. This policy, along with some of the recent changes introduced concerning non-US financial institutions where they are obliged to notify the US government of any US citizens with whom they do business, represents a serious effort to improve the compliance of US persons living outside the US.
If you have not been filing Federal Tax Returns as a result of a misunderstanding, or bad advice, then you should consider using the Streamlined Offshore Disclosure Program. However, in the words of the IRS, eligibility for this program is contingent on the fact that your non-filing was as a result of non-wilful conduct.
If you are considering a submission under the Streamlined Offshore Disclosure Program then you need to consider if you qualify for the regime, you must have been physically present outside the US for 330 full days in at least one of the last three years where your Tax Return is delinquent.
If you meet the aforementioned test, you must prepare and file the following documents:
- The previous three years of delinquent Federal Tax Returns
- The previous six years of delinquent Foreign Bank Account Reports (FBARs)
- Form 14653, a Streamlined Offshore Disclosure statement
If you owe any tax this will be payable as well as whatever interest is due. If you have been paying tax to another country then the tax due may not be too onerous. The greatest benefit to filing under the Streamlined Procedure is that there will be no late filing or late payment penalties and no penalties in respect of the late filed FBARs.
This is a very helpful option that has been used without any drama by many US citizens.
Of course, there are many other possible scenarios and if you are uncertain or if you know that you are a US person who lives overseas and did not realize you needed to file US tax returns, or if you have only just discovered that you are a US citizen and are struggling to come to terms with the fact that you have needed to file US tax returns then please contact us to arrange a meeting with one of our US tax advisors as soon as possible to discuss your potential exposure to US Federal taxes