Taxation & Compliance Information
US citizens must file a tax return claiming their worldwide income, even while living abroad if they earn over a certain threshold even if they have already been taxed in the country in which they live. Be sure to find a tax preparer who knows about Foreign Tax Credits and the Foreign Earned Income Exclusion, and how to optimize between the two, to reduce your US tax obligations. You may also have a part-year state return in your departure year. Having a good resident country tax preparer who gets US concepts such as qualified dividends is helpful.
As part of an annual tax return filing, US citizens overseas are also required to file a Foriegn Account Tax Compliance Act form (8938) listing their foriegn investment accounts over a certain threshold. In addition, US citizens are required to file a Foriegn Bank Account Report (FBAR - FinCEN-114) listing all foriegn bank accounts im the cumulutaive total of $10,000. More on FATCA and FBAR can be found under Compliance.
More information is available on the IRS Web site here.
Check ACA's COVID page for updates on IRS filing deadline extensions: https://www.americansabroad.org/coronavirus/
US Taxes Abroad for Dummies and Other Useful Links
US Taxes Abroad for Dummies--basic information about filing from abroad (updated February 2021)
The IRS announces "streamlined" procedures (June 2014--updated Jan. 2020)
International Tax Treaties (Treaty list updated December 2019)
Non-American Spouse: Claiming Spousal Exemption (Updated Feb. 2019)
Non-American Spouse: US Tax Implications (Updated Feb. 2019)
Obtaining/renewing an ITIN for non-US citizens (updated Feb. 2019)
Taxation of Social Security Benefits (Updated March 2014)
Another Tax Form for Americans Abroad (due to the Affordable Care Act) (updated Feb. 2019)
Delinquent FBAR and Tax Filing Penalties (updated Jan. 2020)
The IRS website has a large amount of useful information for overseas taxpayers. It is surprisingly comprehensive. Americans abroad preparing their tax returns will find these links especially useful.
Tax Responsibilities of US Citizens and Resident Aliens Living Abroad (Taxpayer Advocate Service, March 2018)
Frequently Asked Questions about international individual tax matters (Jan. 2020)
International Taxpayers Interactive Tools
Index to IRS information for international tax matters (Jan. 2020)
Taxpayers Living Abroad
Guide for US taxpayers living outside the USA (Jan. 2020)
IRS Publication 54, Tax Guide for US Citizens and Residents Abroad provides a general overview of tax filing regulations affecting Americans resident abroad. Publication 54 in pdf format (updated Dec. 2019)
IRS Works to Help Taxpayers Affected by ITIN Changes (updated Dec. 2019)
U.S. Government Civilian Employees Stationed Abroad (Publication 516 in pdf format, updated November 2018)
Some exceptions to FATCA reporting rules (Updated August 2019)
Comparison of form 8938 and FBAR requirements (Updated Dec. 2019)
Contacting the IRS from overseas (updated Jan. 2020)
Tips for US Taxpayers with Foreign Income (historical content, March 2014)
What You Should Know about the Additional Medicare Tax. IRS Tax Tip 2014-54 Another IRS tax tip – related to the 0.9% additional Medicare Tax – which would affect self-employed Americans abroad (historical content, April 2014)
Four Things to Know about Net Investment Income Tax [NIIT]. IRS Tax Tip 2014-48 (historical content, April 2014)
Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act, known as FATCA, was passed in 2010 as part of the HIRE act. FATCA requires foreign financial institutions (FFIs) such as local banks, stock brokers, hedge funds, insurance companies, trusts, etc. to report the accounts of all US citizens (living in the US and abroad), US "persons," green card holders and individuals holding certain US investments, to the IRS or to the government of the bank's country for further transmission to the US through Intergovernmental Agreements (IGAs) or be subject to a 30% withholding on their US investments.
FATCA also requires US citizens who have foreign financial assets in excess of $50,000 (higher for bona fide residents overseas – $200,000 for single filers and $400,000 for joint filers – see the IRS website for more details) to report those assets every year on a new Form 8938 to be filed with the 1040 tax return.
In addition Americans abroad are required to file a Foreign Bank Account Report (FBAR) for every year in which they hold financial accounts with a sum total over a certain threshold. This is entirely separate to submitting annual tax returns.
There are various IRS programs in place for individuals who need to become compliant with the filing of Foreign Bank Account Reports (FBAR) The following information is provided as a brief explanation of the programs available.
This information is not a replacement for qualified, professional tax advice for those individuals considering FBAR compliance. ACA recommends that individuals considering becoming FBAR compliant seek the advice of a professional tax adviser prior to moving forward with compliance.
For more information on locating qualified tax preparers see: http://www.acareturnpreparerdirectory.com
Streamlined filing procedures for U.S. citizens (and Green Card holders) residing outside of the US
These procedures generally apply when: i) the taxpayer failed to report income, ii) tax is owed, and the iii) the failures were “non-willful.” The filing must include a narrative statement of non-willfulness.
No penalties will be applied. However, the returns filed under the streamlined program may still be selected for audit.
Delinquent FBAR Submission Procedures
These procedures generally apply when the taxpayer did not fail to report any income and does not owe any tax, but innocently (non-willfully) failed to file a required FBAR, or innocently (non-willfully) failed to include an account on a previously filed FBAR. These taxpayers can go back and file the delinquent FBARs with a statement indicating why the FBAR is being filed late.
The IRS will not impose a penalty for failure to file the FBARs. If the taxpayer subsequently gets examined and discovers that the taxpayer did in fact fail to report income, penalties can then be applied.
Quiet Disclosure Procedure. This was much more widely used by non-willful taxpayers before the availability of the streamlined procedures and delinquent filing procedures. The IRS has said repeatedly that taxpayers filing quiet disclosures will have no penalty protection (both for willful and non-willful behavior) if they get examined.Delinquent FBAR and Tax Filing Penalties
Delinquent International Information Return Submission Procedures (i.e., Form 8938, Form 5471,Form 3520, etc.)
Similar to the delinquent FBAR submission procedures, these procedures generally apply when the taxpayer did not fail to report any income and does not owe any tax, but innocently failed to file any of the required international forms.
The taxpayer can file the delinquent forms, but must include a statement of reasonable cause for the failure to file the form, and certify that any entity for which the information returns are being filed was not engaged in tax evasion. Assuming the IRS accepts the reasonable cause explanation, penalties will not be applied. However, the IRS can still examine the filed forms or the associated tax returns.
Offshore Voluntary Disclosure Program (OVDP)
This program, no longer available, was applied when the taxpayer willfully neglected to report income and file FBARs. With this program taxpayers received a closing agreement, and the returns filed within the program were generally no longer examined. Entry into the program was expensive and binding. Penalties were applied, including a 27.5% or 50% offshore penalty based on the highest value of the assets held offshore during the disclosure period (8 years). It was a laborious process, so associated professional fees were much higher compared to the other procedures.
This program was generally appropriate for taxpayers who acted willfully because if the IRS caught up such individuals before they entered the OVDP, the results were much worse than if they had entered the OVDP. If a taxpayer who acted willfully did not enter the OVDP program and get examined by the IRS, they were potentially subject to the very severe willful failure penalties, or even criminal prosecution in certain cases.
Recent IRS Announcement on FBAR penalties
The IRS has recently released updated guidance regarding FBAR examinations and FBAR penalties to make the process and potential penalties slightly more taxpayer friendly (the “Guidance”). The Guidance applies to FBARs that are under examination. The Guidance does not impact the procedures described above that are available totaxpayers to get right with the IRS before an examination occurs.
- Examination Procedure: Now, the IRS examiner must “consult with the division’s FBAR coordinator after making a preliminary determination of penalties, and obtain the approval of the group manager.”
- Penalties - Willful Failures: Penalties for willful failures to report still exist for those individuals who fall outside of the aforemented programs or who chose Quiet Disclosure where there is not penalty protection. For years under examination that involve willful failures, the Guidance indicates that “in most cases”, the total penalty for all years under examination will be 50% of the highest aggregate balance of all unreported accounts. The highest possible penalty will be 100% of the highest aggregate balance of all unreported accounts. This is a change as, prior to the Guidance, the IRS could assess penalties for willful failures equal to a multiple of the value of the unreported foreign accounts. The IRS is recognizing that assessing a penalty of over 100% of the value of the account might violate the Eighth Amendment prohibition against excessive fines and penalties.
- Penalties - Non-willful Failures: Penalties for non-willful failures to report still exist for those individuals who fall outside of the aforementioned programs or who chose Quiet Disclosure where there is no penalty protection. For non-willful failures, the total penalty will be limited “in most cases” to $10,000 per year, regardless of the number of unreported accounts for the years under examination. In addition, the total penalty for non-willful failures will be limited to 50% of the highest aggregate balance of all unreported accounts for the years under examination. This is a change as, prior to the Guidance, an individual was potentially subject to penalties of $10,000 per account per year for non-willful failures.
- Complete information on the filing of an FBAR form can be found at the following IRS website: Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service (irs.gov)
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