US Citizens Living Overseas May Be Required to File US Taxes

The US is one of the few countries to tax their citizens not on their US residency status but on their citizenship. This means that US citizens and Green Card holders living outside of the US are still required to file an annual US tax return with the IRS.

Many Americans believe the Foreign Earned Income Exclusion (“the exclusion”) prevents them from having to file a tax return.  Unfortunately, this is incorrect, as the exclusion must be taken on a timely filed tax return.

The annual filing obligation is required even if the US person has little or no US source income and ultimately there is minimal zero US tax due on the tax return. There can be hefty penalties for non-compliance with many of the penalty regimes applying financial penalties despite no tax actually being due.

As well as the tax return filing obligation there are other potential filing requirements for the US citizen.  One of the most common of these is the Report of Foreign Bank Account. U.S. citizens, residents and certain other U.S. persons must annually report their direct or indirect financial interest in, or signature authority over, a financial account that is maintained with a financial institution located in a foreign country (ie: outside of the U.S.) if, for any calendar year, the aggregate value of all foreign accounts exceeded USD $10,000 at any time during the year. Financial and criminal penalties may apply for non-compliance.

In 2012, the IRS announced streamlined procedures for individuals residing outside of the United States. In 2014, the streamlined procedures were extended to taxpayers residing in the United States and are still available to this day. Under the streamlined procedures, taxpayers are required to file three years of amended tax returns and six years of delinquent FBARs. No miscellaneous penalty is applied to eligible non-resident taxpayers.

Taxpayers submitting a streamlined filing are required to certify that their “failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct.” Taxpayers must certify that they understand that “non-willful conduct is 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.” Furthermore, taxpayers are instructed to provide a narrative that explains their failure to report the financial account, including specific reasons for the failure to report all income, the source of funds in all foreign accounts or assets, and the name of any professional advisor involved. The clear purpose of these instructions is to allow the IRS to determine eligibility into the program.

In September 2019, the IRS introduced an alternative procedure, Relief Procedures for Certain Former Citizens. In general, this procedure allows:

  • File returns without penalty for not filing previous years
  • For people with a CLN (Certificate of Loss of Nationality)
  • Social Security Number / TIN not required
  • Exempt from paying tax (if under $ 25,000)

The Relief Procedures for Former Citizens allows a taxpayer to come back into US tax compliance without actually having to pay any tax owed, provided they meet the following criteria:

  1. Their failure to file tax returns was non-willful.
  2. They did not previously have a filing history as a US citizen or resident.
  3. They had an average annual net income tax liability after credits for the 5 years ending before the year of expatriation below a certain annually-adjusted threshold (US$168,000 for 2019).
  4. They had global net assets of less than US$2,000,000 at the time of expatriation and at the time of filing their return under these procedures.
  5. They did not have an overall tax liability of more than US$25,000 over the five tax years prior to expatriating and in the year of expatriation.
  6. They agree to complete and submit all required Federal tax returns for the six tax years at issue, including all required schedules and information returns, including FBAR.

The IRS is also allowing individuals to file tax returns under the Relief Procedures without needing to obtain a Social Security Number (SSN) – a lengthy and administratively burdensome process for citizens living outside of the US.

Giving up your US citizenship is a serious matter that may have unintended consequences. We recommend you seek advice before acting.

If you would like further advice, and assistance with your US taxes, please contact us to discuss your situation and how AmTax can help.