Living overseas is a thrilling and life-enhancing experience, however American expats must still remember to file a US federal tax return every year.
This is because unlike most other countries, the US taxes based on citizenship. This means that all Americans whose income exceeds IRS minimum thresholds have to file US taxes, regardless of where in the world they are or where their income is sourced.
Minimum thresholds start at just $5 for Americans married filing separately from a non-US taxpayer, or just $400 of self-employment income.
Filing from abroad often involves extra complication, too, such as currency
conversions, filing additional forms to avoid double taxation, and expats often have extra reporting requirements relating to foreign bank accounts, investments, and business interests.
As America is the only developed nation that requires expats to file, many Americans living abroad aren’t aware of this requirement, so they run the risk of receiving a letter from the IRS asking why they aren’t compliant.
Can Uncle Sam find you if you’re living abroad? In the age of interconnected digital international banking unfortunately the answer is yes.
A 2010 US law known as FATCA (the Foreign Account Tax Compliance Act) compels all non-US banks and investment firms to report their American account holders directly to the US Treasury, while the US has information sharing agreements with most other countries. Taken together, this means it’s no longer possible to fly under the IRS’ radar.
So, what should Americans living abroad, who haven’t been filing US taxes, do to become compliant?
The answer depends a little on each individual’s circumstances. For example, if you are an American living abroad and you have only missed one or two years, you can normally simply back file those years.
If you have missed three or more years on the other hand because you genuinely weren’t aware of (or didn’t comprehend) the requirement to file from abroad, you may qualify for an IRS program called Offshore Streamlined Procedures.
The program requires that you file your last three missed federal tax returns, and your last up to six Foreign Bank Account Reports (just for the years when you met the requirement to) and self-certify that your previous non-compliance wasn’t due to a willful avoidance of responsibility.
The Streamlined program allows qualifying expats to avoid any penalties that might have been due, and they can claim exclusions and credits available for expats that allow the majority of people to avoid facing any US back taxes.
Many Americans abroad, such as expat parents who are eligible to claim the US Child Tax Credit, even find that they receive a significant IRS refund thanks to becoming compliant.
For the minority of non-compliant expats who don’t qualify for the Streamlined program, there may be other options, so if you have any questions always seek advice from an expat tax specialist.
It’s important to note that the program is voluntary, which means it’s only available to expats who haven’t been contacted by the IRS yet. So if you’re in this situation, don’t wait or delay.
The Offshore Streamlined Program is a great opportunity for non-compliant US expats to catch up without facing penalties and, more often than not, back taxes either.
Jeff Chaney is a Managing CPA at Bright!Tax, and a leading expert in US taxes for Americans living abroad. Bright!Tax is a multiple award-winning US tax services provider for American expats.
Note that this article is not legal advice and cannot be relied upon as such.