American citizenship comes with many exciting benefits, but also with some (potentially) unexpected responsibilities. Just one example - all Americans, including those living abroad, must file a federal tax return to the IRS each year. Why? Because all Americans must report their worldwide income on an annual basis.
That being said, a handful of US expats are unaware of this requirement. In fact, the US is one of only two countries that utilise citizenship-based taxation. So naturally, this initial revelation may cause expats to worry about possible penalties if they have missed a year (or more) of tax filings.
Thankfully, a programme is in place, allowing them to catch up without facing penalties: introducing the Streamlined Procedure!
Ongoing compliance procedures for US expats
Before delving into the details behind Streamlined Procedure, it’s worth outlining the ongoing (and the most basic) compliance procedures for US expats when it comes to taxes.
Expats have to file Form 1040 annually, just like Americans stateside. However, one notable difference when filing abroad is US expats receive an automatic two-month filing extension (until June 15), which can be further extended to October 15, if necessary.
Tax benefits when filing abroad
The main reason for these extensions is to allow US expats to file their foreign taxes first. American expats have the option to claim the Foreign Tax Credit (FTC), which allows them to offset taxes already paid to another country.
Another exemption US expats can claim is called the Foreign Earned Income Exclusion (FEIE). Currently, the FEIE allows expats to exclude up to 112.000 US dollars of their earned income from taxes. The exact figure is adjusted each year for inflation.
To qualify for the FEIE, expats must prove that they live abroad in one of two ways:
- Showing they are a permanent resident in another country
- Spending 330 full days outside the US in any 365-day consecutive period
Additional requirements & Responsibilities
Besides filing an annual federal tax return, expats may have additional reporting requirements too, such as submitting a Foreign Bank Account Report (FBAR).
Expats who hold at least 10.000 dollars in foreign bank and investment accounts (combined) must file an FBAR each year with the US Treasury. This includes any accounts they have signing authority over (even if not in their name) at any time during the year.
Important callout: this threshold is calculated from the aggregate of all your foreign accounts combined. So, if you have one account with 3.000 dollars and a second with 8.000 dollars, you will need to file an FBAR because the combined total in all foreign bank accounts exceeds the 10.000-dollar threshold.
You realise you’re behind on your US taxes - What next?
Expats who aren’t compliant with their US filing obligations can become subject to penalties without their knowledge. Not knowing your reporting responsibilities is no excuse and can be an expensive mistake.
The 2010 Foreign Account Tax Compliance Act (FATCA) gives the IRS access to expats’ foreign bank and investment account details. This information can be used to compare against filed (or non-filed) FBARs.
Introducing the Streamlined Procedure
The good news: thankfully, expats can catch up and become compliant with their federal tax and FBAR filing requirements without facing any penalties. All while retroactively claiming the exemptions that, for most expats, mean they won’t owe any US taxes. In some cases, filing past returns can result in an unexpected yet positive surprise in the form of a refund (yes, even if you didn’t pay taxes during the year).
What requirements exist for the Streamlined Procedure?
The Streamlined Procedure lets US expats catch up by filing their past three years of federal tax returns and the last six years of FBARs. You must meet a couple of criteria in order to qualify for the Streamlined Procedure:
- You have a taxpayer ID number (such as a Social Security Number)
- The IRS didn’t contact you first
- You declare your lack of filing was “non-willful conduct”
Non-willful conduct essentially signals to the IRS that your non-compliance was due to the fact you were previously unaware of your filing requirements or that some other life circumstance got in the way. In this case, you’ll have to fill out Form 14653.
How can I prepare for the Streamlined Filing Procedure?
The Streamlined Procedure offers a great opportunity for US expats to be compliant with minimal time and cost.
To best prepare for these filing procedures, you should take these three basic steps:
- Gather your past three years’ worth of tax documents
- Collect foreign financial account statements from the past six years
- Consider consulting a tax professional to offer guidance and instil the confidence you’re getting the job done right!