Below are 14 frequently asked questions regarding the Streamlined Filing Compliance Procedures.
Q1. What are the Streamlined Filing Procedures? And do I qualify?
It is important to note that there are two versions of the procedures. The first is the Streamlined Domestic Offshore Procedures and the second is the Streamlined Foreign Offshore Procedures.
To qualify for the procedures, you must have unreported foreign income (non-US) and your failure to report that income must have been non-wilful. If the IRS has already initiated a civil examination in your tax returns, then you may not be eligible.
To qualify for the foreign procedures, you must not maintain a US abode and have one year out of the last three tax years where you have spent at least 330 days outside of the US.
If you do not qualify for the foreign procedures because you maintain a US abode or have spent too much time in the US, then you may still qualify for the domestic procedures. Please note that unlike the foreign procedures, the domestic procedures do come with penalty charges
Q2. What is non-wilful?
The IRS defines non-wilful conduct as conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Q3. I was born in the US but left at a very young age. Do I have to file US tax returns?
The simple answer is yes. It is also worth noting that the income filing thresholds in the US are very low, so it takes relatively low-income levels to trigger a filing requirement.
Q4. My Green Card has expired. Do I still need to file US tax returns?
Yes. Unless the Green Card has been rescinded by filing Form I-407, the US tax filing requirement still exists. You should always seek tax and immigration advice before rescinding your green card.
Q5. When will the Streamlined Filing Compliance Procedures program close?
We do not have a precise date on when the program will close, but indications from the Internal Revenue Service (IRS) are that a decision on when to close the programme will be made soon. The IRS commissioner made an announcement in November 2019 that ‘nobody should anticipate that the Streamlined Filing Compliance Procedures will last forever’. In a call made to the IRS disclosure team in February 2020, it was confirmed that internal discussions were taking place to close the procedures.
The COVID-19 pandemic may have delayed that decision, but an announcement should be expected soon.
Q6. What do I have to include in a submission?
Typically, three years of Income Tax returns reporting worldwide income and capital gains. There are also certain foreign asset disclosure forms that may need to be included with those Income Tax returns.
In addition to this, six years of foreign bank account reports (FBAR) should be submitted disclosing details of your non-US bank accounts, including the maximum balance each year.
Finally, a statement must be submitted providing details on your situation, including your financial history and an explanation of why you believe your failure to file was non-wilful.
Q7. I have paid tax to my local resident country already. Will I pay tax twice?
There is a sophisticated system of claiming foreign taxes paid against any US tax liability, so in theory the answer is no. In practice, it is not always that straight forward.
For someone who is employed in the UK and pays UK tax through PAYE, it would be highly unusual for there to be a US tax liability. There is also a foreign earned income exclusion of just over $100,000 where earnings (employment/self-employment) can be excluded from taxation. However, this exclusion must be claimed with the filing of a tax return.
Q8. Will my non-US spouse also need to file a tax return?
Typically not. The US system of global taxation does not automatically extend to family members who are not US persons.
Q9. Will my minor children need to file?
If your children generate investment income, then they may need to file US tax returns. It may also be possible to include their income on your tax filings.
Q10. What penalties am I exposed to?
Some penalties are tax-based, others are penalties based on the failure to file a particular form. As an example, an FBAR failure could result in a $10,000 penalty per year. If you qualify under the Streamlined Foreign Offshore procedures, then all penalties are waived. Interest will be due on any tax liabilities.
The Streamlined domestic offshore procedures replace the usual penalties with a one-off 5% penalty based on the value of certain foreign assets.
Q11. What if I do nothing?
The US authorities have introduced legislation in recent years that requires all foreign financial institutions to identify who their US clients are and provide that information to the IRS. This information exchange is already happening. Our advice would be to take advantage of the Streamlined Filing Compliance Procedures now to avoid some nasty penalties in the future.
Q12. I don’t have a social security number. Can I still submit tax returns?
You will need a social security number before entering the Streamlined Filing Compliance Procedures. It can take some time for a number to be issued, so you should start the application process as soon as possible.
Q13. Will I hear back from the IRS following my submission?
Typically, no. It is a case of ‘no news is good news’ with these procedures. You would only hear back if there was a problem with your submission.
Q14. Can I just give up my US citizenship?
You can renounce your US citizenship. However, the tax rules here are complex and an individual would usually want to be compliant with five years of tax filings before going through that process.
A second filing programme does exist to help facilitate individuals who wish to renounce their citizenship.
Would you like to know more?
If you have a question about whether you may have a US filing requirement, please get in touch with your usual Blick Rothenberg contact, or John Bull.
Or if you would like to learn more about whether you may owe the IRS taxes or about the Streamlined Filing Compliance Procedures, please visit our hub.