What Should Expats Do If They Have Not Filed US Tax Returns?
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Expats with Missed US Tax Return Filings
When a United States relocates overseas to live as a US Expat, oftentimes they are under the understandable misconception that they are no longer required to file US tax returns unless they have US-sourced income, but that is incorrect. As long as the US Expat is considered to be a US person, such as a US Citizen, Lawful Permanent Resident, or Foreign National who meets the Substantial Presence Test (because they travel to the United States efficiently to be considered a US person), they are still required to file US tax returns and report their worldwide income and foreign assets. Despite all the unnecessary fear-mongering expats will undoubtedly encounter as they begin their research quest about getting back into tax compliance, there are generally some relatively straightforward methods for getting into compliance with the IRS and oftentimes it will not result in any penalties. Let’s take a look at what expats should do if they have never filed a tax return.
Is the Expat Non-Willful?
There are many options available to expats who are considering filing US tax returns in years they have already missed filing; the key issue always boils down to willfulness versus non-willfulness. When the taxpayer is non-willful there are various offshore amnesty options available to them to try to get into compliance for prior year nonreporting. If instead, the taxpayers were willful there is still a program they can use to get into compliance but there is only one option and is referred to as the IRS Voluntary Disclosure Program.
Expat Offshore Amnesty Residence Requirement
Presuming that the taxpayer is non-willful, if they are able to show that they qualify as a foreign resident then they may be able to avoid all fines and penalties under the Streamlined Foreign Offshore Procedures. The foreign residency requirement varies depending on whether the taxpayer is a US citizen/permanent resident or whether they are a US resident because they met the Substantial Presence Test in one of the past three years. The test is different than the foreign residence test required to prove the Foreign Earned Income Exclusion.
FEIE and FTC
Even if the taxpayer has unreported income, they may still be able to avoid any US tax on that income. If the taxpayer already paid income tax overseas, they may qualify for foreign tax credits to offset or eliminate any US tax liability on their foreign income. If they have earned income and/or housing expenses, they may qualify for the Foreign Earned Income Exclusion as well to exclude upwards of $110,000 of their foreign income as well as claim certain foreign housing expenses.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties.
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