It doesn’t come as a surprise that the IRS will be filling the budget hole in 2023 by cracking down on non-compliant U.S. citizens living abroad. Even expats that didn’t know about their debt may face some serious penalties and fines. To address your tax issues and take control of the situation – start learning about Tax Amnesty Programs the IRS offers. These procedures can help you come clean about your U.S. taxes while escaping all undesirable consequences.
What is a tax amnesty program?
The IRS is aware that many American Expats don’t know about their filing obligation to the U.S. The tax amnesty programs can be seen as a way to “clean the slate” and start fresh with regard to tax compliance. It allows delinquent taxpayers to pay their debt in exchange for avoiding severe tax penalties, and interest too.
Most expats who find themselves in the position of not having satisfied their U.S. tax obligations may feel as if fixing the situation is daunting. Contrary to popular belief, the financial consequences of your failure to file before may not be as severe as one might expect.
For accidental Americans and other late filers, catching up on those returns may be easier now than ever, as there are several programs to assist U.S. citizens living abroad. If you haven’t kept up with your foreign reporting obligations – find out which Amnesty Programs are available and what makes you eligible to use them.
IRS Amnesty Programs
The IRS Programs are set up to encourage people to catch up with their tax filings while taking advantage of various financial benefits. Let’s take a closer look at your options:
- Since 2012, non-compliant U.S. citizens have been able to catch up with their taxes through the Streamlined Foreign Offshore Procedures. You can get compliant by filing three years of delinquent tax returns and 6 years of delinquent FBARs.
- Then in 2019, the agency launched another program for those who have renounced their citizenship but did not file U.S. tax returns (Relief Procedures for Certain Former Citizens).
The Streamlined Compliance Procedures
Most expats who failed to file their delinquent returns did not intentionally evade their responsibilities. Instead, they simply weren’t aware of the requirement to file from abroad. The same goes for accidental Americans – people who have never lived in the United States or even had a US passport.
They will find this program particularly useful, as it allows them to fulfill their tax obligations and renounce their U.S. citizenship without incurring any additional back taxes or penalties.
The Streamlined Filing Compliance Procedures are available to U.S. expats certifying that their failure to report foreign financial assets and pay taxes did not result from willful conduct. In other words, they need to prove they didn’t evade taxes deliberately.
- Even if you haven’t filed for many years, this program allows you to file just the last 3 tax years, greatly reducing the burden and the amount of work involved.
- If you are eligible to use Streamlined Procedures, you will not be subject to any penalties.
This includes failure-to-file and failure-to-pay penalties, accuracy-related penalties, and information return penalties. You will avoid penalties related to Report of Foreign Bank and Financial Accounts (FBAR) and other repercussions for non-filing with regard to foreign income.
Who can use Streamlined Compliance Procedures?
This amnesty program is available to U.S. citizens residing outside the United States (the Streamlined Foreign Offshore Procedures), as well as taxpayers residing in the United States (Streamlined Domestic Offshore Procedures). Requirements for both groups of residents are the same.
You will need to meet the following conditions:
- Non-residency requirement
To be eligible for this program, a taxpayer has to be considered a foreign resident. To the meet non-residency requirement, you need to certify that you haven’t been a resident of the U.S. for the last three years. Or, you must follow the 330-day rule, which means you have physically lived outside the U.S. for at least 330 days during one or more of the previous 3 tax years.
- Non-willful conduct
To be eligible for the streamlined filing compliance procedures, you must be found to have engaged in non-willful conduct. Non-willful conduct is a result of negligence, mistake, or a good-faith misunderstanding of the requirements of the law. Simply put – you need to provide evidence that you didn’t violate regulations on purpose.
Returns submitted under the streamlined filing compliance procedures will not be subject to IRS audit automatically.
They can be selected for audit only under the existing audit selection processes applicable to any U. S. tax return. Even when your returns as part of Streamlined Procedures are selected for audit, you will not be subject to penalties for being a late filer.
But keep in mind – If you apply for this program and the IRS later finds evidence of past willful avoidance, you can still be penalized. That’s why taxpayers should always obtain professional tax advice before signing a certification of non-willfulness and entering the Streamlined Procedures.
What do I need to become compliant under the Streamlined Filing Compliance Procedures?
- Your federal income tax returns for the last 3 years. Note, the returns must be delinquent. The 2022 tax return won’t be delinquent until June 15th, 2023. As such, if you were to file under the compliance program now, you would file the 2019-2021 tax returns.
- You also need to file your delinquent FBARs (Report of Foreign Bank and Financial Accounts – Form FinCEN114) for the last 6 years.
- Finally, you need to provide a certification statement that you didn’t willfully violate the regulations (Form 14653).
If you want to apply for Streamlined Procedures, you will need a valid Taxpayer Identification Number (TIN). A proper TIN is a valid Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). This is where the situation gets complicated for accidental Americans.
Maybe you were born in the United States but you left the country as a young child, before getting a Social Security Number. Or maybe you were born to U.S. parents living abroad and never even registered with the U.S. government Vital Records Office. The IRS is just starting to realize how serious this issue is, and how it stands in the way of taxpayers becoming compliant. These are the solutions they came up with so far:
- If you are ineligible for an SSN but don’t have an ITIN, you can still apply for Streamlined Procedures. In that case, your submission needs to also include a complete ITIN application.
- If you are not eligible for an SSN or ITIN, your can’t apply for Streamlined Procedures. However, additional options are still available to help you ease your tax burden. Keep reading to find out more about Relief Procedures for Certain Former Citizens.
Relief Procedures for Certain Former Citizens
This tax amnesty program is made for accidental American citizens who have renounced or plan to renounce their US citizenship, and want closure with their IRS filing obligations. Similarly to Streamlined Compliance Program, you will have to meet the criteria of non-willful conduct if you want to qualify for Relief Procedures. Here are some of the main benefits that come with this amnesty program:
- Filing delinquent Federal Tax Returns without penalty for not filing previous years
- Social Security Number / TIN not required
- For people with a CLN (Certificate of Loss of Nationality)
- Exempt from paying tax (if under the $25,000-dollar threshold)
Who is eligible to use Relief Procedures?
To qualify for the Relief Procedures program, you will need to meet all of the following requirements:
- You have renounced your U.S. citizenship after March 18, 2010., or are intending to do so.
- You don’t have a filing history as a U.S. citizen or U.S. resident. Keep in mind, if you filed in the past as a non-resident, you are still eligible for the program.
- You did not exceed the annual threshold for average income tax in IRC 877(a)(2)(A) for the period of 5 tax years prior to the date of your expatriation.
- Your net worth was less than $2,000,000 at the time of expatriation and at the time of making your submission under relief procedures;
- Your total aggregate tax liability does not exceed the 25,000-dollar threshold over the period of 5 tax years prior to your expatriation, and in the year you expatriated.
- You agree to complete and submit all required tax returns for the 6 tax years at issue. This includes all required schedules and information returns.
IRS Amnesty Programs FAQ
- What is the IRS standard for willfulness?
Willfulness means you were aware that your actions were unlawful, and you intentionally continued to violate your legal duties. Willfulness is shown by your knowledge of reporting requirements and your conscious choice not to comply.
- Will IRS forgive all penalties and interest for late filing?
Yes! The best feature of these Amnesty Programs is that all your late-filing and late-payment penalties are completely waived.
- How long does the Streamlined Filing Compliance Procedure take?
The IRS usually takes between 90 and 120 days to process your streamlined tax returns, but the process can take longer.
- How long will Streamlined Procedures be available?
A termination date hasn’t been specified, but the program will most certainly not be around forever. If you qualify for the program, now is a good time to get started.
- Can a married couple file together for the Streamlined Compliance Program?
Yes, they can file for a joint Streamlined procedure, provided that they file together and the spouse has a valid SSN/ ITIN.
- What happens if your tax returns are up to date, but you haven’t filed FBARs for your foreign accounts?
If you included the interest from foreign bank accounts on your filed tax returns, you should file the FBARs using the Delinquent FBAR Submission Procedure. But if you haven’t reported the interest from foreign countries, you will need to file amended tax returns through the Streamlined program, along with 6 years of FBARs.
- What to do if you have years of unfiled taxes?
If the IRS accepts your application under the streamlined program, the amount of time you spent being non-compliant will not make a difference. Whether you owe taxes for a few years or more than a decade, all you need to do is to file the last 3 tax returns.
At 1040 Abroad, we understand the complexities of US tax obligations for expats and are committed to providing free tax advice to all US expats via email. Our team of expert accountants can guide you through the process and ensure that you stay compliant with all applicable tax laws. Don’t hesitate to reach out to us for help navigating your state tax obligations as a US expat living abroad.