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If you’re an American living in another country and have not filed tax returns in the United States for sometime, you might be wondering how to get caught up. This article will explain the process.
First, take solace in the fact that you’re not alone in your predicament. Many Americans abroad have no idea that they were supposed to be filing U.S. tax returns. Often, expats realize it after running into an issue when returning to the U.S. or when opening a bank account overseas. That’s why the IRS introduced a special program, known as the Streamlined Program, to help you file your back taxes without any late fees or penalties. We’ll explain how that program works, and how Visor can help you resolve any problems with the IRS.
Let’s dig into the details.
Filing Back Taxes Without Penalties – the IRS Streamlined Filing Compliance Procedures
For expats who need to get caught up with their back taxes, the IRS designed the Streamlined Filing Compliance Procedures program.
At the core of the Streamlined program is a give-and-a-get situation. There’s what you, the taxpayer, give the IRS. And there’s what you get from the IRS.
What expat clients give to the IRS:
- 3 years of past-due income tax returns;
- 6 years of past-due Foreign Bank Account Reports (FBAR); and
- Pay any taxes owed (and interest on that tax amount).
What expat clients get from the IRS:
- No late-filing penalties;
- No late-payment penalties;
- No FBAR penalties.
Who Qualifies for the Streamlined Program?
The Streamlined program comes in two varieties: one is for Americans living inside the U.S., and the other is for Americans living outside the U.S. This article focuses on the Streamlined program for Americans living abroad.
Americans living outside the U.S. are eligible for the Streamlined program if they meet the following four conditions:
- You (and your spouse if filing jointly) have lived outside the United States at least 330 full days in any one (or more) of the three most recently missed tax years (e.g. as of the date of this article, the deadline for tax year 2017 has not yet passed so we would look at years 2014, 2015 or 2016).
- You did not file taxes as required during that time period;
- Your failure to file tax returns was “non-willful,” (as in you were unaware of the requirement); and
- The IRS has not yet started an audit or criminal investigation of any of those tax returns.
What Does the Filing Process Look Like?
The IRS expects you to file the past three years of missed tax returns and the past six years of foreign bank account reports (FBAR), complete with a two-page overview summarizing everything. Additionally, the IRS wants the taxpayer to provide a written statement explaining why the tax returns are late.
The process when using Visor works like this. We will work with you to prepare your U.S. tax returns and FBARs. We ask you to write out the initial draft explanation of why your tax returns are late (known as the non-willful conduct statement), and we’ll help you finalize it. Once you have reviewed and signed all final documents, you will pay our flat fee, and then we complete the filing.
You’ll be able to use our online platform to answer questions easily and upload your tax documents to us. We guide you through the whole process, answering any of your questions along the way.
It’s Been Longer Than Three Years Since I Last Filed a Tax Return. What Should I Do?
What you should do depends on what your situation is.
Generally speaking, we recommend that you start by using the Streamlined Program to get caught up for the past three tax years.
Beyond three years, we need to take a careful look at what was going on in those earlier years. We suggest that we get your tax returns prepared, and from there to see how much tax you owe for all the years combined. We can then advise you more clearly on the best way to handle the situation.
Does the Streamlined Program Include My 2017 Tax Return?
The Streamlined Program covers the most recent three tax years where the deadline was missed. The filing deadline is June 15 for expats (which can be extended to as late as October 15 if you submit for an extension by June 15). As of the date of this article, the deadline for tax year 2017 has not yet passed, so the Streamlined Program would cover tax years 2014-2016. Once the June 15 deadline comes and go, the years covered by the Streamlined Program will shift to 2015-2017. If you are ahead of the deadline for the 2017 tax return filing, we’d recommend starting with that one, and we are happy to prepare it for you. Once the 2017 tax return is filed, we’d then start on the Streamlined Program for the previous three years. You can find more information on our Expat Tax Services page.
Can You Further Explain the Non-Willful Statement?
This is your chance to tell the IRS your side of the story of why your tax returns are late. You need to write this yourself.
Our best advice is you should stick to the facts and explain what happened clearly and concisely. You should state the specific reasons why your tax returns are late. You should also note from where the money sitting in your foreign accounts originated. Any additional special circumstances, such as whether you sought advice from an accountant or lawyer, should also be included.
What Does “Non-Willful” Mean?
A key issue is whether the reason your tax return is late is due to “non-willful conduct.” Analyzing this requires a careful eye. What we need to work with is the following statement. “Non-willful conduct,” the IRS says, “is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law” (Source: IRS.gov).
By contrast, “willfulness,” the IRS describes in their Tax Crimes Handbook (2009), “is defined as the ‘voluntary, intentional violation of a known legal duty.'” (Source: IRS.gov).
In our experience, most expats fit under the definition of non-willful, as they simply misunderstood the filing requirement for American citizens living abroad. If you fit in that camp, then the Streamlined Program is for you.
Will I Need to Pay Any Penalties?
For Americans living abroad, the IRS Streamlined Program waives any late penalties. That means you will not be subject to any of the following:
- the late filing penalty;
- the late payment penalty;
- the accuracy-related penalty;
- penalties for late filing information returns;* and
- penalties for late filing the FBAR.
* Information returns include Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621. These are specialty forms to disclose certain types of international transactions. For example, gifts or inheritances from foreign persons, investments made in foreign corporations, the statement of foreign financial assets, and investment earnings from foreign mutual funds. Each of these specialty forms would normally have their own penalties.
I Reside Inside the United States. Can You Help Me File Through the Streamlined Program?
Yes. We would love to help you. Be aware that the IRS will impose a 5% penalty instead of other penalties that might apply. This penalty is based on the highest total year-end balance across all your previously undisclosed foreign financial assets in the past six years.
Ready to take the next step? You can start the process of working with Visor by going here: Streamlined Program for Expats.
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