Are you a U.S. citizen or green card holder living overseas? Did you know that the U.S. is one of the few countries in the world that taxes based on citizenship rather than residency? U.S. citizens and green card holders are required to file annual U.S. income tax returns, reporting worldwide income and gains, no matter where they live in the world.
On December 4, 2015, President Obama signed into law the Fixing America's Surface Transportation Act ("FAST Act"). The FAST Act provides a new means by which the IRS can enforce compliance with U.S. tax laws. Included within the FAST Act is a new provision authorizing the IRS to notify the State Department of any U.S. citizen who owes more than $50,000 in federal tax, penalties, and interest. The State Department may then revoke the citizen's U.S. passport and deny issuance of any new passport until the outstanding debt is paid. Exceptions apply for taxpayers who are making timely payments to the IRS under an installment plan, and taxpayers whose debt collection is suspended pending a due process hearing or while seeking "innocent spouse relief." In addition, a passport will not be revoked by the State Department if it is required for humanitarian or emergency purposes, or for a direct return to the United States.
The law reinforces the importance of careful attention to US tax compliance, including timely filing of tax returns, compliance with foreign financial asset and bank account reporting, proper reporting of income, and timely payments of balances due. It is also extremely important for taxpayers to keep their addresses current with the IRS, so that any tax notices are received and resolved promptly. These steps will reduce the risk of deficiency notices that could ultimately cause not only financial issues, but the denial or revocation of a U.S. passport.
If you only recently became aware of your filing obligations, the good news is that you're not alone and there is currently a special procedure to get delinquent taxpayers back on track.
The IRS recognizes that many U.S. taxpayers overseas have not timely filed their U.S. income tax returns or Foreign Bank Account Reports (FBARs) and that these taxpayers should not be exposed to harsh penalties for a non-willful failure to comply with these reporting requirements. As a result, the IRS introduced the Streamlined Compliance Filing Procedures to allow eligible U.S. taxpayers to file delinquent or amended U.S. tax filings and become compliant.
For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the taxpayer must:
- File delinquent or amended tax returns, including all required information returns as applicable
- File delinquent FBARs (for each of the most recent 6 years which the due date has passed)
- Pay the full amount of tax and interest due with returns
- Certify that failure to report all income, pay all tax, and submit all required information returns (including FBARs) was due to non-willful conduct
If the IRS has initiated a civil examination of your returns for any taxable year, you are not eligible for the Streamlined Compliance Filing Procedures. As foreign financial institutions continue to share more information with the IRS, it's only a matter of time before the IRS learns about your foreign accounts. We recommend taking advantage of this opportunity to get back on track while it's still available.
Authored by Robert Greene, Manager and Christopher Hall, Managing Director for GTN US Northeast. Our GTN US Partners specialise in providing tax services to U.S. taxpayers living overseas. Please contact Robert Greene or Christopher Hall with any questions regarding these procedures.