If you’ve fallen out of compliance with your US tax obligations through no fault of your own, the IRS’s Streamlined procedures are a straightforward way to get up to date, with significant protection from penalty exposure. Here’s the advantages and qualifying criteria.

US tax reporting requirements

The US is unlike other tax jurisdictions because if you’re a US citizen or green card holder, you remain within the US tax system even if you have moved away from the US or have never lived there at all. You must file a US tax return each year if your income exceeds certain filing thresholds and you must meet certain reporting obligations each year. For example, you must file the ‘Foreign Bank Account Report’ (FBAR) if you have more than $10,000 in aggregate across your non-US financial accounts.

It’s common for some Americans to not realise that their tax obligations follow them abroad, and so incorrectly cease filing their tax returns after their move away from the US. Additionally, the term ‘Accidental American’ refers to anybody who does not even realise they are an American citizen. This most commonly applies when an individual was born in the US, and moved abroad at a very young age, or was born outside the US, and had at least one American parent. These ‘Accidental Americans’ will have the same US tax obligations as any other US citizen.

If you discover such reporting obligations, it’s likely to be quite daunting and a source for stress and worry. After all, no one wants to find themselves on the wrong side of the IRS. We have considerable experience with helping clients navigate the pitfalls present for the unwary, and guide them through bringing their tax affairs up to date and staying compliant.

The Streamlined Programs

The IRS, to its credit, recognised the problems encountered by such non-wilful US individuals and so introduced the ‘Streamlined Filing Compliance Procedures’. This allows them to get up to date without having to file every single tax return or reporting obligation that they have missed. Considering some taxpayers may not have been filing (or incorrectly filing) their US taxes for decades, this is a very helpful relief.

As part of the streamlined program, you will be required to file the following forms:

• Prior 3 years of late US tax returns

• Prior 6 years of late FBARs

• Non-wilful streamlined certification statement

Once filed via streamlined, an individual will be considered fully up to date and compliant with their US tax obligations.

Other than the limited number of filings required, the other benefit of the streamlined procedures is the penalty protection it offers. There are in fact two separate streamlined programs, the ‘Streamlined Foreign Offshore Procedures’, and the ‘Streamlined Domestic Offshore Procedures’, both of which have slightly different qualifying conditions and penalty protection.

Streamlined Foreign Offshore Procedures

To qualify for the Streamlined Foreign Offshore Procedures, firstly you will have to have been physically outside the US for at least 330 days for at least one of the three years in question. So for example, if you are filing 2022, 2023 and 2024 US tax returns via these procedures, you will need to have been outside the US for at least 330 days in any of the 2022, 2023 or 2024 calendar years.

Additionally, to qualify for the Streamlined program, your non-compliance will need to be considered ‘non-wilful’. The IRS defines this 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”. Careful consideration should be given to all relevant facts and circumstances to make this determination, and part of the program requires an explanation be provided to the IRS in support of this.

If you qualify for the Streamlined Foreign Offshore Procedures, you will not be subject to failure to file and failure to pay penalties, accuracy related penalties, information return penalties or FBAR penalties. Considering the civil penalties for some of these forms can be $10,000+ per form per year, that is clearly of great benefit. Any tax due would need to be settled and late payment interest would remain.

Streamlined Domestic Offshore Procedures

For those individuals that were not physically outside the US for at least 330 days for at least one of the three years in question, they may instead qualify for the Streamlined Domestic Offshore Procedures. It is common for these procedures to apply for an individual resident on the US who has been filing their US tax returns, however, has inadvertently omitted or incorrectly reported various foreign assets or income on their return because they were not aware of their obligations to do so.

The individual’s behaviour for not filing, or incorrectly filing, must be non-wilful, as discussed above. The various filing requirements will be the same, however, this procedure does apply a penalty to the taxpayer. This penalty is equal to 5% of the highest value of any foreign assets in the streamlined period that had not been correctly reported to the IRS.

These procedures however do avoid the other failure to file and failure to pay penalties, accuracy related penalties, information return penalties and FBAR penalties. Given some of these penalties can be $10,000+ per form per year, the 5% penalty can still provide significant penalty protection.

Relief procedures for certain former citizens

There is one further amnesty program offered by the IRS known as the ‘relief procedures for certain former citizens’. This offers a way for US citizens living abroad to simultaneously become compliant with their US tax filings, while expatriating as a US citizen. To qualify for these procedures, you would need to meet the following criteria:

• Your net worth is less than $2m at time of expatriation and at time of making the submission

• Your aggregate US tax liability across the year of expatriation, and the prior 5 years, is $25,000 or less

• Your behaviour for not filing US tax returns was non-wilful

• You have no filing history as a US citizen or resident

As part of these procedures, you will be required to file 6 years of US tax filings; the year of expatriation, plus the 5 preceding tax years. The submission of all tax returns will have to be completed all at once after expatriation has been completed. It may be important to begin preparation of the various returns prior to expatriating to ensure that the aggregate tax liability condition above is met.

Via these procedures you again are protected against all penalties, and in addition you are also exempt from paying any tax liability shown across the relevant 6 years. This could of course be of great benefit.

One point to note is that a social security number (SSN) is not required to submit via the relief procedures for former certain citizens. This can be useful for those individuals who are ‘Accidental Americans’, never obtained an SSN, and no longer wish to be an American citizen.

Careful consideration should be given prior to expatriating as a US citizen. For more information on this topic, please do read our insight on this topic.

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If you’ve recently become aware of your US tax obligation, or identified an issue with your US tax filings, fill out the form below and one of our US tax experts will be in touch to help you get your filings up to date.