updated 2:11 PM CET, Oct 31, 2023

A brief Bright!Tax Guide: How expats can catch up with their U.S. tax filing obligations

'Tax Day' for Americans living outside of the U.S. was on June 15. But not everyone who should have filed their 2020 U.S. tax returns by that date will know that.

Because, as Allyson Lindsey, Bright!Tax partner and managing Certified Public Accountant explains below, millions of Americans who currently live overseas have failed to file U.S. tax returns covering one or one or more years that they should have...

Allyson Lindsey Bright Tax cropped... typically because they weren’t aware that they needed to keep filing U.S. tax returns after they moved abroad, and started to file taxes in the country in which they currently live.

Here, Lindsey explains how such expats can arrange to catch up with their U.S. tax filing obligations...

It's a little-known fact – even in the U.S. – that ever since the days of the American Civil War (1861– 1865), the U.S. has required its expats to file U.S. tax returns every year, as long as they lived abroad and remained U.S. citizens.

One reason this fact has remained so little-known all this time is because until only recently, the U.S. hasn't been able to enforce it.

It is now enforceable, however, due to a combination of the introduction of the Foreign Account Tax Compliance Act, in 2010, and a growing shift into the digital space by the international financial services and banking industries. 

There is, however a way that Americans living abroad who weren’t aware that they had to file U.S. taxes can catch up without facing penalties – and, for the majority of expats, without owing any back taxes either.

The 'Streamlined Procedure' 

If you’ve just missed one or two years, it’s normally possible simply to "back file" your missed returns.

If you’ve missed three or more years, though – or even if you've been out of compliance for many years – the best way to catch up is under an IRS amnesty program called the Streamlined Procedure.

The program requires expats to file their last three missed returns, along with up to six missed FBARs (Foreign Bank Account Reports, required for Americans with over $10,000 in foreign accounts at any time in a year).

The final requirement is to submit a statement in which you must explain why you failed to file these forms for the tax years in question.  

The program allows Americans filing from abroad to claim such IRS provisions as the Foreign Earned Income Exclusion and the Foreign Tax Credit for the years they failed to file – which reduce most expats’ U.S. tax bills to zero, whether filing late or on time.

The Foreign Tax Credit gives U.S. tax credits up to the same value as foreign taxes paid in another country, to avoid double taxation of the same income.

The Foreign Earned Income Exclusion lets Americans living abroad exclude the first around $107,600 of their earned income from U.S. taxation.

These provisions must be claimed when you file though, as they’re not applied automatically. Neither can both of them be applied to the same income.

It’s necessary to file and claim them, because international tax treaties between the U.S. and other countries don’t otherwise prevent double taxation.

The good news, again, is that once you file and claim them, the majority of expats don’t owe any U.S. income tax.

Self-employed American expats still have to pay U.S. Social Security taxes though, (unless they pay foreign Social Security taxes, and live in one of around 30 countries with which the U.S. has a double Social Security tax treaty called a Totalization Agreement.

It’s important to note that the Streamlined Procedure program is voluntary. This means that Americans living abroad must use it to catch up before the IRS contacts them, after which time it won’t be available, and back taxes and penalties may apply. It's even possible to find yourself unable to use or renew your U.S. passport.

As such, it’s important to catch up voluntarily using the program as soon as possible when you realize that you have to file.

(More information about this may be found on the Bright!Tax website here.

Another important point is that the Streamlined Procedure program is only for anyone who hasn’t been filing because they genuinely weren’t aware of, or misunderstood, the requirement to file, rather than what the IRS calls willful avoidance of responsibilities.

We recommend that Americans living abroad other than those with the most simple financial circumstances seek assistance when filing their U.S. taxes from abroad, to ensure they not only meet the rules but file in their best interests.

As an example, Americans living abroad also have access to all the same credits as Americans in the U.S., some of which are refundable.

Examples are the Covid relief stimulus checks, and the American Child Tax Credit, which means Americans living abroad can end up receiving a refund from the IRS despite not owing any US tax.

Allyson Lindsey is a partner and managing Certified Public Accountant at Bright!Tax, an online global provider of U.S. tax advice and services for expatriate Americans around the world. Those wishing to stay on top of coronavirus developments from a tax perspective can check out Bright!Tax's Coronavirus News webpage. 

The views expressed above are for general information purposes only, and should not be construed as recommendations or advice for any individual, nor should any action be taken on account of the information presented. Further information may be obtained by contacting Bright!Tax at https://brighttax.com.

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