What if a US Expat Files Late Tax Returns or Foreign Accounts

For U.S. Expats Late Filing Tax Returns and FBAR

Can Expats File Late Tax Returns Safely?

Most countries (aside from the United States) only require taxpayers who are residents of their country to file annual tax returns to report their worldwide income. This is referred to as Residency-Based Taxation. Unfortunately, the United States is one of only a few countries that follows a Citizenship-Based Taxation model, which means the United States taxes U.S. Citizens, Lawful Permanent Residents, and other residents who qualify as US persons for tax purposes on their worldwide income — whether or not they reside in the U.S. or live abroad. Thus, it is very common for a US taxpayer expat who lives overseas to be unaware that they were required to file income tax returns while they were living abroad and/or report their worldwide income — even if they live overseas and all their money is sourced overseas. Let’s take a brief look at how expats can amend prior tax returns or file late tax returns safely to get into compliance.

Tax Returns and International Reporting

The first thing to keep in mind is that taxpayers have both a tax and reporting requirement. In other words, taxpayers are required to report their worldwide income to the U.S. government as well as disclose information about their foreign accounts, assets, investments, and income on various international reporting forms such as the annual FBAR and Form 8938.

Is The Taxpayer Non-Willful?

In order to qualify for most of the different amnesty programs, taxpayers must qualify as non-willful. There is no bright line test to determine whether a taxpayer qualifies for non-willfulness, rather it is based on a totality of the circumstances test by the IRS. If the taxpayer is willful, they would instead submit to the IRS Voluntary Disclosure Program.

Are There Unreported Accounts or Assets (Streamlined)?

If the taxpayer has unreported accounts, assets, or investments, then typically they would pursue the primary streamlined filing compliance procedures as the method for getting into compliance (if they qualify). There are two different streamlined programs that taxpayers can submit to depending on whether they qualify as foreign residents or not. There are different requirements for each program, noting that under the Streamlined Foreign Offshore Procedures taxpayers can file original tax returns whereas under the Streamlined Domestic Offshore Procedures, taxpayers may only amend previously filed tax returns.

Are there No Unreported Assets? (Reasonable Cause)

If the taxpayer does not have any unreported accounts, assets, or investments then they may not need to submit to the Streamlined Procedures. Rather, they may only have to file a late tax return(s). Sometimes the late or amended return will include a reasonable cause statement – this is usually dependent on the specific facts and circumstances surrounding the late/amended filing and if the Taxpayer has the potential to become subject to various fines and penalties such as failure to file and failure to pay.

Can the Expat File a 1040NR with 8840/8843?

Some taxpayers who qualify as U.S. Persons because they met the Substantial Presence Test may be able to avoid filing a Form 1040 as a U.S. person and instead can file a Form 1040NR as a non-resident alien (to avoid worldwide income). But, in order to do so, the taxpayer must meet one of the exceptions or exclusions to the Substantial Presence Test and usually file a Form 8840 and/or Form 8843 in conjunction with their Form 1040NR. In this type of scenario, taxpayers will only pay U.S. tax on their US-sourced income instead of their worldwide income.

Can the Expat File a 1040NR with a Treaty Election 8833 Instead?

For taxpayers who do not meet the exceptions under 8840 or 8843 and/or are considered Lawful Permanent Residents of the U.S., they may be able to make a treaty election if they reside in a treaty country. The treaty election may allow the taxpayer to be treated as a foreign resident for tax purposes and therefore would not have to file a Form 1040 but rather a Form 1040NR with a Form 8833 treaty election (and only pay U.S. tax on their US-sourced income).

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

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 who 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. 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. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.