Expatriates Running out of Time to Avoid IRS Penalties
United States citizens (and green card holders) residing outside the U.S. often lose sight that they are required to file an annual income tax return with the Internal Revenue Service and report their world-wide income. An expatriate who learns about the U.S. filing requirement often does not know where to begin, especially if they have been living overseas for many years and have not been filing U.S. tax returns.
In an effort to help the “expatriate community” the IRS has initiated a simplified filing procedure called the Streamlined Foreign Offshore Procedures. The program is beneficial for expatriates that can demonstrate their lack of filing was as honest mistake as a result of a good faith misunderstanding of the requirements of the law.
One of the requirements of the new program is that the IRS has not already contacted an expatriate about any tax year that is not in compliance. Thus, an expatriate will need to file the back tax returns before being contacted by the IRS to avoid penalties.
Although the time frame is not clear, the IRS is going to accelerate contacting expatriates based on the data is it able to obtain pursuant to the Foreign Account Tax Compliance Act or FATCA. FATCA is already requiring foreign banks and in some cases foreign governments to share information about U.S. account holders with the IRS. Presumably, the IRS will be able to use the information gathered under FATCA to start contacting U.S. expatriates about their unreported foreign accounts and missing U.S. tax returns. Once the contact is made the IRS has the ability to request all missed income tax returns (going back many years) and impose penalties on top of any tax and interest due.
An expatriate who can demonstrate that she has not acted willfully to avoid U.S. taxes can get into compliance under the Streamlined Program by filing U.S. tax returns for the three most recent years for which the due date has passed and an information return for foreign financial accounts for the six most recent years. There may be other information returns required depending on the facts and circumstances.
If the IRS accepts the submission under the program then no penalties will apply. Any tax and interest would be payable with the tax filings. The expatriate would need to keep in compliance going forward.
Expatriates who work in high tax countries (compared to the US) typically can utilize the income taxes paid in the foreign country against the U.S. tax liability. Also, there is a special tax exemption for U.S. taxpayers who work abroad that can also help manage the tax liability. So, often an expatriate will owe very little U.S. tax.
One disadvantage of the Streamlined Procedure is that the IRS does not provide any confirmation or agreement once the tax returns are filed. So, an expatriate needs to be comfortable in her representation that the failure to file was not willful. If the IRS has reason to believe the failure to file was willful then the IRS will initiate an examination of the returns and could initiate harsh penalties. Typically, the IRS has three years to examine a tax return once filed.