Should Americans Abroad File Back Taxes or Report Accounts?

Guide for U.S. Expats who Did Not File or Report Account

Guide for U.S. Expats who Did Not File or Report Account

The United States is one of the only countries across the globe in which taxpayers who are considered U.S. persons for tax purposes but are not residents of the United States are still required to file U.S. taxes as if they were residents — and report their worldwide income. For example, if a U.S. expat lives in a foreign country and earns all their income from foreign sources, they are still required to report this income each year to the U.S. government on a U.S. tax return. In addition to having to report their foreign income, U.S. expats are also required to report their foreign accounts, assets, and investments to the U.S. government each year on various international information reporting forms, such as the FBAR and Form 8938. The failure to report foreign accounts, assets, and investments can lead to significant fines and penalties.

The Penalties Can be Harsh

Oftentimes, international reporting penalties do not go through typical ‘deficiency procedures.’ Instead, they are automatically assessed, and taxpayers do not have the opportunity to challenge the penalty until the penalty has been issued — which puts the taxpayer on the defense. To assist taxpayers who are out of compliance, the United States has developed various international tax amnesty programs. For taxpayers who qualify for these programs, they can minimize or even eliminate any fines and penalties. Once a taxpayer finds himself out of compliance it can be a very stressful undertaking trying to figure out what to do next. Let’s go through some of the basics of what expats can do to get into compliance.

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Is the Expat a U.S. Citizen or LPR?

One of the preliminary considerations for taxpayers who were considered expats and out of compliance is whether they are U.S. citizens or Lawful Permanent Residents. While either U.S. citizens or residents may qualify for the Streamlined Procedures if they meet the threshold for doing so, taxpayers who are permanent residents may qualify to make certain treaty elections if they reside in the treaty country and meet the eligibility requirements. Retroactive elections (especially for LTRs) can be very complicated, so taxpayers should take note of this before just filing multiple delinquent tax returns with Form 8833.

For Overseas U.S. Citizens, are they an Accidental American?

For taxpayers who are considered U.S. citizens, they typically cannot make the same type of elections that lawful permanent residents would make. Some taxpayers who are U.S. citizens and have lived overseas their entire life, they may be categorized as Accidental Americans. While these taxpayers do not think of themselves as Americans, since they are U.S. citizens, it is not easy for them to make the same types of treaty elections or take certain tax positions when filing their tax returns. For taxpayers who are Accidental Americans, oftentimes the Streamlined Foreign Offshore Procedures is a great program to assist them with getting into compliance. Taxpayers may also want to consider the relief procedures (discussed below).

What Types of Foreign Accounts and Assets Do You Have?

Once the taxpayer establishes what their U.S. person status is and that they are out of compliance in prior years for tax and international reporting, the next thing to consider is what type of foreign accounts and assets the taxpayer has. There are many different international information reporting forms that a taxpayer may have to file when they have foreign accounts, assets, and investments.

Some common types of foreign accounts and assets that are reportable, include:

• • • Current Accounts

    • Savings/Checking Accounts

    • Stock Accounts

    • Fund Accounts

    • Unit Trust Accounts

    • Minor Accounts

    • Life Insurance ‘Accounts’

    • Retirement Accounts

    • Pension Accounts

What Potential Foreign Tax Forms are Required?

After the taxpayer has made an inventory of their foreign accounts, assets, and investments, the next thing to consider is which international information reporting forms they are required to file. For every type of foreign account or asset the taxpayer has, the IRS has developed an applicable international reporting form. The complexity of the forms vary, based on the category of assets, the value of the accounts, and whether there is any unreported income. Sometimes, the same asset may be reported multiple times in the same year on different forms.

It is also important to note that different forms may have different threshold requirements for having to file that form and the various forms may have different due dates for when the form is due — and under what circumstances it is either required to be filed or exempt from filing.

Some of the more common international information reporting forms include:

• • • FBAR

    • Form 8938

    • Form 8621

    • Form 3520

    • Form 3520-A

    • Form 5471

    • Form 8865

Which IRS Offshore Program is Right for You?

When a taxpayer is ready to get into compliance, they have many different options available to them depending on the specific facts and circumstances of their situation. Some key preliminary determinations are to determine whether the taxpayer qualifies as willful or non-willful, whether they filed tax returns in prior years that were incomplete or never filed the form at all, and whether the taxpayer qualifies for the reasonable cause exception or delinquency procedures. Some of the more common international reporting programs include:

• • • Streamlined Filing Compliance Procedures

  •  

    • Streamlined Domestic Offshore Procedures

  •  

    • Streamlined Foreign Offshore Procedures

  •  

    • Voluntary Disclosure Program (VDP)

  •  

    • Deliquency FBAR Procedures (DFSP)

  •  

    • Delinquent Forms Procedures (DIIRSP)

Will You Continue to File or Expatriate?

Some taxpayers who are U.S. citizens or Long-Term Lawful Permanent Residents, have to determine whether they want to continue being a US person for tax purposes. Some taxpayers decide that they would rather renounce their US citizenship (common amongst accidental Americans) or they want to terminate their lawful permanent resident status. When the taxpayer qualifies as either a US citizen or long-term lawful permanent resident, there are various hoops they have to jump through to properly give up their U.S. person status, and this is referred to as expatriation. For taxpayers who are required to formally expatriate, if they are considered to be a covered expatriate then they may become subject to an exit tax — the exit tax only applies to U.S. citizens and long-term lawful permanent residents.

Accidental American Relief Procedures

When a taxpayer wants to renounce their US citizenship (or may have recently renounced or terminated their U.S person status), they may qualify for relief procedures. Taxpayers who qualify under the relief procedures may be able to avoid having to pay any taxes at the time they terminate their status. But, it is important to note that there are very specific requirements, and not all taxpayers will qualify for the relief procedures.

Do You Need an Attorney?

No, an expat is not required to hire an attorney to get them into compliance for prior year missed forms. But, The U.S. tax system can be very overwhelming and complicated– especially for taxpayers who do not have any experience filing annual returns. In these types of situations, the taxpayer may want to consider hiring a tax professional. Typically, a dual-licensed EA/Attorney is the preferred credential.

Is Your Offshore Disclosure Specialist Really a ‘Specialist’?

Not everyone who claims they are an offshore tax ‘specialist’ is actually a specialist, and this can get taxpayers into deep trouble with the IRS. Any attorney can go online and prepare a marketing ad or website claiming they specialize in offshore compliance. Most of the time, you will find that these marketing techniques are little more than mere puffery and that these attorneys do not have the requisite experience to represent taxpayers in offshore compliance matters and may offer a ‘free‘ initial consultation (aka fear-mongering sales pitch couched as an initial consultation).

The reason we know this is because each year we get many cases referred to us from taxpayers who learned after the fact that the attorney they hired did not understand the submission requirements, did not have the experience they claimed to have, and did not understand the nuances of the submission process. Taxpayers can usually avoid this type of situation by ensuring their attorney has at least 20 years of legal experience, a dual license as an Attorney/EA (or CPA), is a Board-Certified Tax Law Specialist by at least one state bar association — and specializes exclusively in offshore disclosure matters. If the attorney checks those boxes, then there is a good chance you will find yourself an attorney who can assist you with getting into compliance.

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.