Previous U.S. Citizens Abroad and Taxes

The IRS is fully aware that some United States taxpayers living overseas have failed to file U.S. federal tax returns or reports of Foreign Bank and Financial Accounts (FBARs) on time for various reasons. In fact, some of them have recently become aware of their tax filing requirements and would like to comply with the law. Like any tax return, you should file back taxes as soon possible to claim any refunds or to pay due tax.

Related: details on previous year tax refunds and tax penalties if you owe taxes.

How to File Back Taxes with Foreign Residency?

Since Tax Year 2013, the IRS has provided an option to help U.S. citizens residing full-time in foreign countries, including dual citizens, catch up with their tax filing obligations if they owe little or no back taxes. In addition, the IRS will provide assistance for those with foreign retirement plans, foreign saving plans, and offshore asset issues.

Generally, U.S. taxpayers can do this without risk of tax penalties or additional enforcement action from the IRS, but there may be penalties if you were required to file a tax return and you did not or you did not pay the taxes due shown on your return.

Taxpayers can only file delinquent tax returns (along with appropriate and related information returns) for the past 3 tax years.
If taxpayers have delinquent FBARs, they can only file them for the past 6 tax years.

The IRS will review the submissions, but the intensity of the review will vary according to the level of compliance risk presented by the submission.

KEY TAKEAWAYS

U.S. citizens living abroad may have missed filing federal tax returns and FBARs, but the IRS has options to help them catch up without facing severe penalties. Those who owe little or no taxes can benefit from simplified procedures designed to encourage compliance.
The IRS allows taxpayers to file delinquent returns for the past three tax years and FBARs for the last six years. This streamlined process aims to facilitate compliance while reducing the risk of audit or penalty for low-risk submissions.
Compliance risk is a crucial factor in IRS reviews. Taxpayers presenting simple returns with low tax liabilities face less scrutiny, whereas complex returns may trigger audits, increasing the likelihood of penalties and extended reviews.
Individuals claiming reasonable cause for late filings must provide a signed statement explaining their circumstances. The IRS assesses reasonable cause based on factors like compliance history and the nature of the taxpayer's efforts to meet obligations.

What Is Compliance Risk?

In terms of IRS procedures, compliance risk is a warning the IRS poses to your personal or company's earnings or capital as a result of violation or nonconformance with its laws, regulations, or practices.

If you or your company fails to comply with the necessary standards of IRS law, you may be subject to various tax penalties, such as fines.

Compliance Risk as Determined by the IRS

The IRS will determine the compliance risk level of your tax submission based on specific information provided on the filed returns. It will also be based on certain additional information that the IRS will require you to include along with your submission.

The IRS will determine you may have low compliance risk for the following reasons:

You have a simple return with little or no U.S. tax due,
Your return(s) show that the taxes you owe for each of the last 3 tax years is less than $1,500 (doesn't include high risk factors).

In general, your risk level will rise as your assets and taxable income increase, especially if there are indications of avoidance or sophisticated tax return planning, or there's a material economic activity in the U.S.

Additional compliance risk factors include:

The amount and type of your U.S. source income,
Any additional history of noncompliance you have with U.S. tax law.

The IRS will release additional information regarding the specific factors it will use to assess the compliance risk level prior to the new procedure's effective date. It will also reveal how information regarding those factors should be presented in the U.S. tax submission.

Compliance Risk Status

The IRS will not assert tax penalties or pursue follow-up actions if you present a low compliance risk. In addition, the IRS review will be expedited.

Tax submissions that show higher compliance risk will not be eligible for the procedure. Therefore, they will be subject to a more thorough review and a possible tax audit, which can last more than 3 years in some cases. This procedure is similar to taxpayers opting out of the Offshore Voluntary Disclosure Program (OVDP).

You could be imposed taxes, penalties, and interest based on the IRS review of your tax submission.

How to File Overdue U.S. Returns?

In general, U.S. citizens or resident aliens who have simple income tax returns and owe $1,500 or less in taxes can qualify for the IRS procedure if the returns are within the last 3 tax years. Taxpayers with delinquent FBARs can file them if they are within the last 6 tax years.

U.S. taxpayers who would like to use the new IRS procedure for filing overdue tax returns will be required to submit the following items:

Delinquent tax returns, including appropriate related information returns, for the past 3 tax years,
Delinquent FBARs for the past 6 tax years,
Any additional information regarding compliance risk factors required by future IRS instructions, AND
Any federal tax payments and interest due (if applicable).

More information about the application process, including where submission should be sent, will be provided prior to the effective date of the IRS procedure.

Any U.S. taxpayer who is claiming reasonable cause for failing to file tax returns, information returns, or FBARs will be required to submit a dated statement explaining why there's a reasonable cause for previous failures to file. The statement should be signed under penalties of perjury.

Are there Reasonable Causes for Failing to File a U.S. Tax Return?

Reasonable cause is tax relief that the IRS generally grants to you when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations, but you failed to meet them despite your attempts.

The IRS will consider all available information about you when determining whether you exercised ordinary prudence and business care. This information can include:

Reasons given for not meeting your tax obligations,
Your compliance history,
Length of time between your failure to meet your obligations and your subsequent compliance, AND
Circumstances beyond your control.

Reasonable cause may be established if you prove that you were not aware of specific obligations to file returns or pay taxes owed. This depends on the circumstances and facts that the IRS will consider:

Your education of your specific tax obligations,
Whether you have been subject to the tax(es),
Whether you have been penalized before,
Whether there were recent changes in the law or tax forms that you could not reasonably be expected to know about, AND
A tax or compliance issue's complexity level.

You may have reasonable cause for non compliance due to ignorance of law for one of the following reasons:

You were unaware of the requirement and couldn't reasonably be expected to know about the requirement OR
A reasonable and good faith effort was made in order for you to comply with the law.

Are there Rules for Foreign Retirement Plans?

The plan also allows resolution of specific issues related to certain foreign retirement plans, such as Canadian Registered Retirement Savings Plans.

Can I receive relief for failing to elect income deferral from certain retirement or savings plans when the deferral is permitted by a relevant foreign tax treaty?

In some cases, foreign tax treaties allow for income deferral under U.S. tax law, but only if an election is made on a timely basis. The streamlined procedures will be available to those who need to resolve low compliance risk situations even though this election was not made on time.

How can I receive relief for failing to elect income deferral from certain retirement or savings plans when the deferral is permitted by a relevant treaty?

The IRS will provide retroactive relief for failure to elect income deferral on certain retirement and savings plans on time (where deferral is permitted by a relevant treaty) through the procedure. Along with the tax submission, you should make the proper deferral elections with respect to such arrangements.

How Do I Report Offshore Assets?

The IRS procedure for filing late U.S. tax returns if you are a U.S. citizen or resident alien living and/or working abroad may affect your foreign assets. The IRS voluntary disclosure programs are part of a wider effort to cease tax evasion and ensure tax compliance. These IRS efforts include:

Criminal prosecution
Increased enforcement
Implementation of 3rd party reporting through the Foreign Account Tax Compliance Act (FATCA).

Although the program does not presently have a closing date, the IRS may end the program at a later time.

What Is the Foreign Account Tax Compliance Act?

The Foreign Account Tax Compliance Act (FATCA) is the United States' development created to improve tax compliance involving offshore accounts and foreign financial assets.

U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS under FATCA. Taxpayers will report these assets on Form 8938 (attached to their federal tax returns).

FATCA will also require foreign financial institutions to directly report information about financial accounts to the IRS either held by:

U.S. taxpayers OR
Foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Does the IRS procedure affect the tax loophole(s) I have been applying to my offshore assets?

Yes, it may also affect the tax loopholes you have applied to your offshore assets. If you fail to comply with this law and you don't notify the Department of Justice about the foreign appeal, you'll no longer be eligible for the OVDP. The IRS will also put you on notice that your eligibility for OVDP could be terminated once the U.S. government has taken action in connection with your specific financial institution.

Does the IRS procedure provide protection to me if I am at risk of criminal prosecution?

If you are in a situation where you're concerned about the risk of criminal prosecution, it doesn't provide protection from criminal prosecution if the IRS and the Justice Department determine that your particular circumstances warrant such prosecution.

If you're concerned about criminal prosecution because of your particular circumstances, you should be aware of and consult your legal advisers about the Offshore Voluntary Disclosure Program (OVDP), which offers another means by which your undisclosed offshore accounts may become compliant. You should be aware that once you make a tax submission under the new IRS procedure, OVDP will no longer be available to you. In addition, if you are ineligible to participate in OVDP, you're also ineligible to participate in the IRS procedure.

Do I need to include a taxpayer identification number when submitting late U.S. tax returns under the IRS procedure?

You should include a Taxpayer Identification Number (TIN) with your late U.S. return(s) if you are interested in using the IRS procedure when submitting the return(s). If you're a U.S. citizen, your TIN is your Social Security Number (SSN). If you're not eligible for an SSN, a valid TIN is an Individual Taxpayer Identification Number (ITIN).

Your tax return(s) will not be processed if a valid SSN or ITIN is not included with your return(s).

More Information About Foreign Income and Taxes

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