CPAs for Expats
IRS Amnesty Program for Delinquent US Expats
Updated: Feb 28, 2020
Many of the people we talk to contact us because they read somewhere that they may need to file with the IRS, and my first conversation with them tends to begin with some version of the question: “ME??? Why would the IRS want to hear anything from me? I haven’t lived in the US for years!”
To illustrate, let’s look at the following scenarios:
1) A young couple, James and Lily, age 21, get married in Vermont immediately after finishing university. They decide that their life’s ambition is to move to Australia. Neither of them ever had a job in the United States, but they both quickly find employment in Australia and integrate completely into Australian society. Thirty years pass.
2) James and Lily have a son, Harry. Harry attends Australian schools and has traveled to the United States a few times to visit his grandparents, but otherwise has no connections to the United States. Harry completes university in Australia and is eventually appointed to the head of Australian Law Enforcement.
3) Harry marries Ginny, an Australian citizen. Approximately 32 weeks into Ginny’s first pregnancy, Harry and Ginny are on vacation in New York City when Ginny goes into premature labor and gives birth to a baby boy, whom they name Albus. Harry, Ginny, and Albus return to Australia as soon as the baby is healthy enough to travel.
What do James, Lily, Harry, and Albus all have in common?
Filing Requirements for US Expats
You are correct: Everyone in these scenarios, except for Ginny, is an American citizen and therefore is required to file a tax return to the US every year, no matter where their income is earned.
What is special about all of these characters is that they all have legitimate reasons to think that they would not have to file tax returns in the US:
James and Lily never worked in the United States and haven’t lived there for thirty years.
Harry was born in Australia.
Albus was born in the United States, but his mother is not a US citizen and he left the US immediately after he was born.
None of them have any business or employment connections to the United States, and none of them would reasonably expect the IRS to come calling. However, they are all United States citizens, and the US taxes its citizens, no matter where they live.
Voluntary Disclosure Programs Through the Years
One common complaint I get as a US expat accountant is some version of: “The United States is the only country that taxes its expat citizens except for Eritrea! It’s not fair!” To this, I say: “Correct. Contact your elected officials.”
In the meantime, the IRS realizes the following:
Many US expats do not know of their filing obligations,
The vast majority of US expats do not actually owe tax to the US, and
People will come into compliance with the law if they are given the chance, as long as it is not onerous.
These realizations have resulted in multiple “voluntary disclosure” programs over the years, in which the IRS offers to waive penalties and certain filing requirements to US expats who willingly come forward to come into compliance. Various amnesty programs were introduced in 2009, 2011, 2012, and 2014.
The Streamlined Filing Compliance Procedures
While most of these programs are no longer available, the 2014 program officially called the “Streamline Filing Compliance Procedures” and commonly referred to as the “IRS amnesty program”, remains active.
Eligibility for the Streamlined Procedures for US Expats
Under the Streamline “Foreign Offshore” program, US expats can get amnesty from the IRS for failure to file tax returns if the following conditions are met:
They were “not willful”: The taxpayer must certify that they did not know that they were required to file
They are not being audited: It’s a bit late for a voluntary disclosure if you already got caught.
They have a valid Social Security Number or Individual Taxpayer Identification Number (ITIN): A taxpayer like Harry, above, who was never issued a Social Security Number, must apply for and receive a number before filing tax returns.
They lived outside the United States: The taxpayer must have spent at least 330 days outside the United States in at least one of the last three years. Taxpayers with overseas income who do not meet this requirement use the Streamline “Domestic Offshore” Program, which is not quite as merciful as the programs reserved for US expats.
What is included in a Streamlined Submission?
The Streamlined procedures include three main components:
Three years of delinquent tax returns (or amended tax returns, if returns had been submitted previously), including any special information returns, such as Form 5471 or Form 8938;
Six years of delinquent Foreign Bank Account Reports (FBARs), if the taxpayer had at least $10,000 in financial assets outside the United States;
Form 14653, the “Certification by U.S. Person Residing Outside of the U.S.”, which certifies that the failure to submit the required returns on time was not willful.
Any tax owed on the returns, plus interest.
Why submit under the IRS Amnesty Program?
Wait just a minute, you ask: You mean I still have to pay tax? I thought we were talking about amnesty!
The answer: To be fair, the IRS itself never uses the word “amnesty” when discussing the Streamlined program. However, there is one major advantage to using the Streamlined Procedures:
As part of the Streamlined Procedures, the IRS waives any failure-to-file, failure-to-pay, or estimated tax penalties which would normally be owed on the returns. Also, any penalties that could be assessed for failing to file information returns (forgetting FBARs, Form 8938, or Form 5471 could subject a taxpayer to penalties of more than $10,000 each) are waived.
Timeframe for the IRS Amnesty Program
The IRS Amnesty Program is “open-ended”, which is IRS-speak for “we’ll continue it for as long as we feel like it”. For now, there is no indication that the IRS plans to discontinue the program anytime soon, but that could change at any time.
Consequences of Not Filing
OK, you say, I get it. But I’ve been a US expat for decades now, and no IRS agent has knocked on my door, nor that of any of my neighbors. What’s the worst that could happen?
Well, nowadays, the IRS is equipped with a very special tool it never had before: the dreaded the Foreign Account Tax Compliance Act--better known as FATCA.
Thanks to FATCA, the US has intergovernmental agreements with most countries where all financial institutions with American customers have to send their information to the US, and vice versa. Once the US sees that a US expat has income and accounts that have not been reported on tax returns, then they have several options available to them. Ranging from “possible” to “highly unlikely”, they include (but are not limited to):
Freezing your non-US bank accounts
Penalties for not filing the FBAR or information returns
Confiscating or blacklisting your passport
Criminal prosecution, with penalties up to and including jail time
I’m not saying any of these consequences will happen—although I have seen quite a few frozen bank accounts over the last couple of years. Enforcement in recent years has gone up, and there is no telling how far the long arm of the IRS will eventually reach.
The IRS Amnesty program is one of the IRS’s most generous (if such an adjective can be used about the IRS) offers to US expats in recent years, and should be taken advantage of before it is too late.
If you want to explore your options as a US expat and see if the IRS Amnesty program is appropriate for you, click here and let’s see how CPAs for Expats can help!