THE TRANSATLANTIC MAGAZINE
Are you a US taxpayer who is not up-to-date on their Federal tax filings with the US Internal Revenue Service (IRS)? Do you even realise you may owe the IRS tax?
The current method that allows some people to comply with their US tax filings may be about to close, which could prove to be very expensive, so now is the time to act.
The US tax regime requires non-resident citizens to pay full ongoing ‘home country’ taxation, even if they live or work elsewhere in the world. In fact, every US bi-lateral tax treaty contains a provision protecting their right to continually tax income and gains globally.
Often US taxpayers abroad become delinquent with their reporting obligations and the IRS wants these delinquents to be fully compliant. Since September 2012 they have used a ‘carrot-and-stick’ approach to those who have not deliberately defaulted.
The ‘stick’ is the possibility of hefty penalties in addition to the tax at stake with up to 50% penalties on undisclosed funds and up to 35% penalty on distributions from foreign trusts.
The ‘carrot’ is a scheme called Streamlined Filing Compliance Procedures.
The foreign streamlined procedure is a programme which allows US taxpayers to file the last three years of late US Federal income tax and information returns, six years of foreign bank account reports and settle any US tax payable with late interest, but not be subject to income tax and information return penalties.
To qualify for the foreign streamlined procedure an individual must meet the following criteria:
• Their failure to file is due to non-wilful conduct. This includes negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
• The IRS has not initiated a civil examination of a tax return.
• During the last three calendar years the individual must not have an abode in the US and have one year where they have been physically outside of the US for at least 330 days.
The IRS have always been clear that the programme will have an end date. Recent anecdotal evidence tells us that the end date is coming in the near future. Such a move might come with immediate effect, although there is some precedent to suggest that the closure would be at the end of a period of notice.
The current submission process takes time with everything required by the IRS to be presented in a single package rather than instalments. If the closure of the programme is announced soon and is subject to a short notice period, it may be impossible to assemble the necessary submission before the programme closes.
Therefore, now is the ideal time for any US citizen with a delinquent tax profile who satisfies the ‘non-wilful’ test, to take advantage of the streamlined route back to compliance, before the opportunity disappears.
In 2019 the IRS introduced an additional initiative to the Streamlined Procedures, aimed at US taxpayers who had never filed US tax returns and had either given up their US citizenship or were considering doing so.
They require filing of six years of US income tax returns, with the added incentive that up to $25,000 of tax liabilities will be waived.
To qualify for these procedures an individual must:
• have relinquished their citizenship after March 18 2010.
• not have any tax filing history as a US citizen or resident.
• have a net worth of less than $2million at both the time of expatriation and the time at which they make their submission.
• not have an aggregate tax liability over the year of expatriation and the five years prior exceeding $25,000 (after considering foreign tax credits, exclusions and exemptions but not after any US Federal tax withholding).
• agree to complete and submit all required Federal tax returns (including Foreign Bank Account Reports and other information returns) for all six years.
• have been non-wilful in their failure to file required Federal returns (including income tax returns, gift tax returns, information returns).
This really is the ‘last chance saloon’ for delinquent US tax filers to take advantage of the Streamlined procedures, to become compliant and avoid expensive penalties from the IRS.
If you would like to know more, we have created a Hub which features other useful articles and tools including Our ‘Should I be paying US taxes?’ tool.
If you believe you could be impacted by this and would like to discuss your situation, please contact Adam Smith email@example.com.