Are you behind on your U.S. taxes?
No worries. We can help you come into full compliance with the IRS and often with little or no IRS Tax penalties.
Generally, if you are a U.S. expat (U.S. citizen or green card holder) living abroad, you are required to file a U.S. federal income tax return annually and report all of your worldwide income. Depending on many factors, such as the taxes you paid to a foreign country and your personal family situation, you may end up not owing any taxes to the U.S. Government. However, contrary to common misconception, even in such case, you are still required to file a return and report your worldwide income. In addition, if you maintain a total combined balance in your foreign accounts of $10,000 or more at any point during any given year, you are required to report such balance to the IRS. This reporting requirement is known as the FBAR (Report of Foreign Bank and Financial Accounts). The FBAR form is filed separately from your tax return and, unlike tax returns, no extensions are available.
If you are a U.S. expat who is delinquent on your U.S. tax filings (whether intentionally or not), you may be exposed to certain IRS penalties especially if you owed tax during any of your delinquent years. Ultimately, the penalties will depend on your particular situation. The relevant penalties include:
- Failure to file penalty – 5% of the taxes owed for each month outstanding. The penalty is capped at 25% of the total tax liability.
- Failure to pay penalty – 0.5% of the taxes due for each month outstanding. Unlike the failure to file penalty, there is no limit on the failure to pay penalty.
- Accuracy-related penalty – depending on the particular facts, an additional 20% penalty may apply.
- Failure to file Form 8938 – certain U.S. expats are required to report their interests in foreign financial assets, including investment accounts and interests in foreign entities on Form 8938. Failure to file Form 8938 can result in a penalty of $10,000 per form for each tax year.
- Failure to file Form 5471 – U.S. expats who are officers, directors, or shareholders of certain foreign corporations may be required to file Form 5471 with their U.S. federal income tax return. Failure to file Form 5471 can result in a penalty of $10,000 per form for each tax year.
- FBAR penalty – Failure to report foreign bank accounts can result in a penalty of $10,000 per account per year in the case of a negligent violation. In the case of a willful failure to file, the penalty can be up to 50% of the balance in the account or $100,000, whichever is greater.
- Failure to file Form 3520 – U.S. expats who engage in a transaction with a foreign trust (including the formation of the trust, the transfer of property to the trust, or the receipt of distributions from the trust) or receive gifts from foreign sources, are required to file Form 3520 with their U.S. federal income tax return. Failure to file Form 3520 can result in a penalty of $10,000 or 35% of the gross reportable amount, whichever is greater.
- Interest – of course, unpaid tax liabilities will also accrue interest. Currently, the IRS interest rate is 5%.
- Criminal penalties – A willful failure to file U.S. tax or information returns can be considered a criminal offense, potentially resulting in jail time.
Cleaning Up Shop: IRS Tax Amnesty Programs
Fortunately, there are ways to come into compliance despite filing taxes late without incurring the penalties listed above. Currently, the IRS is offering U.S. expats the ability to come forward and use several tax amnesty programs (assuming they qualify) to clean up a non-compliant history.
- Streamlined Procedures – These procedures are available for U.S. expats whose failure to file was due to non-willful conduct. Under this tax amnesty program, the taxpayer is required to file the prior 3 years of tax returns, including required information returns, and 6 years of FBARs. A delinquent U.S. expat who complies with these procedures will have to pay previously unpaid taxes with interest, but will not be subject to any penalties.
- Voluntary Disclosure Program (VDP) – On September 28, 2018, the IRS ended its former Offshore Voluntary Disclosure Program (OVDP) for willfully delinquent filers and replaced it with a new Voluntary Disclosure Program for willfully delinquent filers. The new program applies to all voluntary disclosures, whether domestic or offshore.Under the new program, voluntary disclosures will generally include a six-year disclosure and examination period, but can vary depending on the circumstances of the taxpayer. Taxpayers must submit all required returns and reports for the disclosure period, and then examiners will determine applicable taxes, interest, and penalties under existing law and procedures.Penalties under the new program include a 75% civil penalty for fraud or civil penalty for the fraudulent failure to file income tax returns (together, the “civil fraud penalty”), which is to be applied to the one tax year with the highest tax liability. It also includes willful FBAR penalties for each year, which are generally equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account. A number of exceptions apply to the penalty scheme depending on the circumstances of the taxpayer.
- Relief Procedures for Certain Former Citizens – On September 6, 2019, the IRS opened a new amnesty program aimed specifically at tax-delinquent US citizens who relinquished, or intend to relinquish, their U.S. citizenship, and who wish to come into tax compliance and avoid being subject to the U.S. exit tax among other negative ramifications associated with non-compliance. Among the requirements, a participant must not be otherwise subject to the U.S. exit tax, and must have an aggregate total tax liability of $25,000 or less for the five tax years preceding renunciation and in the year of renunciation. A successful participant is exempted from paying any penalties, interest, or exit tax, and from paying any income taxes that are otherwise due.
- There are several other tax amnesty programs which may be suitable for taxpayers who do not fit within the scope of the two programs mentioned above. For example, there are special programs and procedure for taxpayers who have only failed to file FBARs or have failed to include an informational return, such as the ownership of their foreign corporation.
Most importantly, a “one-size-fits-all” approach when it comes to these matters simply doesn’t work. Therefore, if you’re behind on your taxes, we strongly suggest that you speak with a qualified tax professional who will listen to your facts and then advise you on the best filing strategy for catching up on your taxes. At Expat Tax Professionals, we have assisted many individuals with sorting out their tax situation while making sure they’re taking full advantage of the benefits afforded by the IRS tax amnesty programs. If you’re behind and need help catching up, please feel free to reach out to us and schedule a consultation with one of our tax professionals. You can reach us at firstname.lastname@example.org or call 718-887-9933 to discuss our tax resolution services.
If you are already under audit, you can no longer apply for any of the IRS tax amnesty programs mentioned above. In addition, bear in mind that the IRS has the right to end the programs at any time, so time is of the essence!