Now that the Foreign Account Tax Compliance Act (“FATCA”) has been in full effect for a while, you may think there’s no longer any way to easily get caught up on past US tax filings.
You may think you should just lay low and hope for the best.
However, that’s not the case at all. Your situation is not hopeless, ignoring the problem is not the best approach, and you can still get everything straightened out.
This article explains how and why (with musical accompaniment-click on each section heading)
Highway to the Danger Zone
Expats with delinquent returns are definitely living in the danger zone. FATCA generally requires non-US financial institutions (such as banks, brokers, and certain life insurance companies) to send reports to the IRS about accounts held by US citizens.
Non-US financial institutions were required to send the first round of FATCA reports to the IRS on or before June 30, 2015. These FATCA reports identify the US accountholder and contain basic information about the account.
So, if you have a non-US bank or brokerage account, it’s very likely that the IRS already knows your name and has details about your account.
The IRS’s personnel levels are close to all-time lows, so everything is done by computer these days. The first step is that the IRS feeds all of the information from non-US banks and brokers into its records management system. The computer then looks for a tax return and Foreign Bank Account Report (“FBAR”) from the US citizen identified in the FATCA report.
For example, if a non-US bank tells the IRS it has an account holder named John Smith, then the computer looks over in the “Smith, John” file for a return and FBAR reporting the account. If it finds one, then all is fine, and no further action is taken.
If the computer doesn’t find such a return and FBAR, it will spit out a letter to the address provided in the FATCA report. This letter may start out as just a “friendly reminder” really—it may just say that the IRS has information indicating that required filings have not been made.
If these letters are ignored, they get less friendly, culminating at some point in an actual audit.
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I Fought the Law and the Law Won
Some expats think it would be difficult for the IRS to come after them. That’s not necessarily the case—the IRS has several ways to reach an expat (or their assets).
For example, expats who hold assets in a US financial institution could have such assets seized or frozen. Additionally, expats who hold assets in a non-US financial institution that has any US branches can also have their accounts seized or frozen—the IRS has the same direct enforcement powers with those institutions as with institutions located in the US
Moreover, the US has entered into a complicated web of agreements with other countries that allow the IRS to extend its enforcement capabilities beyond US borders. For example, the signatories to the Convention on Mutual Administrative Assistance in Tax Matters have agreed to use their own police and court systems to collect tax debts owed to other signatory nations.
So, that’s the bad news—FATCA may start the enforcement ball rolling, and the IRS has ways to enforce beyond US borders.
Now for some good news: most expats qualify for a very easy way to get caught up, which is to use a program called the “Streamlined Filing Compliance Procedures.”
It’s a Beautiful Day
Under the Streamlined program, an expat can get caught up simply by filing 3 years of back tax returns and 6 years of back FBARs.
There are no penalties for expats associated with using the Streamlined program. In fact, participating in the Streamlined program provides explicit protection against the $10,000 penalty for failing to file an FBAR on time. An expat simply must pay any back taxes owed plus interest on those back taxes.
Now, one catch to the Streamlined program is that an expat can only participate if they can certify that their failure to file the proper returns and FBARs was “non-willful.” It takes an experienced tax attorney to look at your specific facts to determine whether the IRS is likely to find you “wilful” or not.
I’ve helped lots of people get caught up using the Streamlined program. I can help you:
- determine whether the Streamlined program is right for you,
- prepare and assist in filing the necessary returns and FBARs, and
- guide you through the entire process.
If you’d like to discuss, get in touch and we can schedule a call.
Want to know more? The Tax-Savvy Expat courses teach you everything you need to know about expat tax.