The Streamlined Procedure – For Expats

by Arun Sharma, in

For US expats living abroad, staying compliant with IRS tax obligations can be a real challenge, especially as many are unaware that they needed to file in the first place! Fortunately, the IRS have a procedure available that enables individuals to file their delinquent returns without facing excessive penalties.

The US is one of the few countries that taxes its citizens on their worldwide income, no matter where they live or work. So, there are many expats who haven’t filed tax returns in years – or maybe ever. This is especially true for ‘Accidental Americans’ – people born in the US but who may have left the country as a child, or those born outside of the US to a US citizen parent. Many of these individuals may never have realised that they had US tax obligations.

If you have fallen behind on your US Federal taxes and FBARs (Foreign Bank Account Reports) whilst living outside of the US and you were not wilfully avoiding your tax obligations, you may qualify for the Streamlined Foreign Offshore Procedures. This is more colloquially known as “the streamlined procedure”.

So, what does this mean for you, and how can you get back on track? Here’s what you need to know.

What is the Streamlined Foreign Offshore Procedures?

The procedure is designed to help expats get back into compliance with their US tax reporting obligations in a simple and penalty-free way. It also allows them to correct past mistakes on their federal tax returns and informational returns, such as:  

  • Form 8938 – Similar to the FBAR but with a higher filing threshold
  • Form 3520 – Reports transactions with foreign trusts and certain foreign gifts
  • Form 5471 – For US persons with shareholdings in foreign corporations
  • Form 8858 – For US persons with foreign self-employment or corporate disregarded entities
  • Form 8865 – For US persons with interests in foreign partnerships
  • Form 8621 – For shareholders of Passive Foreign Investment Companies (PFICs)

What are the Benefits?

If you qualify, the good news is that you will not be subject to late filing, late payment or accuracy-related penalties and information return penalties which can be quite severe. As an example, failing to file an FBAR alone can result in a $10,000 per year fine for non-wilful violations!

If you owe tax, this will be payable along with interest charged from the original due date of the tax payment. However, many expats with foreign income may be able to utilise Foreign Tax Credits (Form 1116) and the Foreign Earned Income Exclusion (Form 2555) to reduce their exposure to US tax.

The procedure only requires a certain number of returns to be filed rather than going back indefinitely, saving you time and money. After a taxpayer has completed the streamlined procedure, they will be expected to comply with US tax rules for all future years and file returns according to regular procedures.

Do I Qualify?

To be eligible for the streamlined procedure, you must meet the following criteria:

  • Non-Wilful: You must be able to explain that the reason for non-compliance was due to “non-wilful actions”. This can be negligence, misunderstanding or a conduct that is result of “good faith misunderstanding of the law”. Taxpayers will have to provide reasons and facts to substantiate their claim of “non-wilful” conduct.
  • Non-Residency Requirement: You must not maintain a US abode and be physically present outside the US for at least 330 full days during one or more of the most recent three years for which the US tax return due date (or properly applied for extended due date) has passed.
  • Have a valid Taxpayer Identification Number (TIN) – Typically, this is a Social Security Number (SSN). It is also possible to submit the streamlined procedures with an ITIN application (Form W-7) under certain circumstances.

What Do I Need to File?

  1. Federal tax returns for last 3 tax years where the deadline passed – These must report your worldwide income (unless you are filing non-resident returns, where US sourced income is reported only). If the deadline for the most recent return (including extensions) has not passed, this will not be a part of your procedure.
  2. FBARs for the last 6 years – You must report all foreign bank accounts (checking, savings and pension accounts) if the combined balances of these exceeds $10,000 at any point during a given year.
  3. Form 14653 – Certification of non-wilfulness. This form is crucial and must confirm your eligibility for the procedure, that all required FBARS have been filed, and your failure to comply was non-wilful.

How do I proceed?

If you’re unsure how to proceed, or if you have recently discovered that you are a US citizen and would like to file US tax returns, then please contact us to arrange a meeting with one of our US tax advisors as soon as possible. It is always best to disclose information to the IRS before they come to you first. If they send you a notice to file, you will not be eligible for the streamlined procedure.

This is a basic summary of the rules and opportunities that may be available. These areas are complex, and you should seek professional assistance if you wish to explore these in more detail.

More information about the streamlined procedure can be found on the IRS website here.

This article on the Relief Procedures for Certain Former Citizens may also be of interest.