Were you born in the US, do you have a parent that is American, or do you hold a Green Card?
If so, you may owe the IRS taxes and face penalties
You could take advantage of IRS Streamlined Filing Procedures
Are you a US taxpayer who is not up-to-date on their Federal tax filings with the US Internal Revenue Service (IRS)? You may not even realise you may owe the IRS tax.
We have created a quick and easy tool to check if you should be filing US tax returns.
The carrot and stick
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.
The current submission process takes time with everything required by the IRS to be presented in a single package rather than instalments.
Therefore, for any US citizen with a delinquent tax profile who satisfies the ‘non-wilful’ test, there is a chance 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)
Conclusion
With potentially large penalties, delinquent US tax filers, who are able to take advantage of the Streamlined procedures to become compliant, can avoid expensive penalties from the IRS.
Our US/UK private client team is made up of experienced personal tax advisers who are passionate about their field of expertise. We will work with you, your family and your business to minimise tax impacts across both the US and UK.
Would you like to know more?
If you believe you or your client could be impacted by this, please get in touch with your usual Blick Rothenberg contact or one of the team using the form below to explore if there is a requirement to file with the IRS.
To help you, we also have several other useful articles and tools available, including:
- Our ‘Should I be paying US taxes?’ tool
- Frequently asked questions about the Streamlined Procedures
- Illustrative case studies for the Streamlined Procedures
- Downloadable PDF of the Streamlined Procedures overview
For expert advice on how to manage your US/UK personal tax affairs as well as those of your business, please visit our US/UK private client area.
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