The US is one of only two countries in the world (the other being Eritrea) to tax their citizens on their worldwide income regardless as to where they are living. This means that most US citizens (including Green Card holders) who are living outside of the US, are required to file annual US tax returns with the IRS.
There are many individuals living outside the US that could be unaware of this. Some are regarded as “Accidental Americans” where they acquired US citizenship at birth but have spent very little or no time living in the US (for example someone born outside the US to an American parent or someone born in the US but who then left at a very early age).
This article discusses the Streamlined Filing program that the IRS introduced just over 10 years ago, which is designed to help “non-wilful” US persons to get back into the US tax filing system and thereby become US tax compliant. This program could however, be withdrawn at any time and a more draconian program could once again be reintroduced.
“But I have no tax to pay so it’s probably not necessary?”
The annual US tax filing obligation is required even where a US person (citizen or Green Card holder) has little or no US source income since they are required to report their worldwide income on a calendar year basis. Due to the offset of foreign tax credits in respect of any taxes settled in the country in which they reside, it might well be the case that there could be little or no US tax payable. However, this does not remove the US tax filing obligation.
As such, the completion of US returns could be regarded as an annual administrative burden. That said, if someone has income that is taxed at a low or zero rate in a non-US country, then US tax liabilities may arise. By way of example, in the UK there would no charge to UK tax on income earned in an ISA or typically from the sale of an individual’s principal private residence but these would both usually be subject to US taxes.
The same may also be true for a US person who works in a country whose tax rates are not as high as the US and so due to insufficient tax credits, there may still be an additional US tax liability.
Foreign Bank Reports
In addition to the tax return, US persons may be required to file foreign bank reports. These forms are required annually if an individual holds more than $10,000, in aggregate, within non-US bank accounts. If someone is required to complete these under the streamlined filing program, then forms for the last 6 years must be prepared.
A link to these reports and form instructions are below.
Getting up to date
So, how does someone become tax compliant under the streamlined filing procedure? In summary:-
• Submit late US tax returns for the last three years (currently 2019-2021) and settle any taxes due.
• Submit late Reports of Foreign Bank accounts for the last six years (currently 2016-2021).
• Complete a form 14653 to state which US tax returns are being submitted along with an explanation as to why the returns are being submitted late.
Please note that this Streamlined Filing program is only available to individuals who comply voluntarily with their US tax filing obligations. In other words, those who come to realise that they have a responsibility to file and then do so within a reasonable timeframe, are allowed to take advantage and as a result, will usually not face penalties for failure to comply.
In situations where the IRS discover that a particular individual has a US tax filing obligation that has not been complied with, the Streamlined program will usually not be available and late filing penalties may then be applied in relation to certain information forms, even where there is no liability to US tax. Further penalties can also be applied, together with late payment interest, where there is a US tax liability.
Renouncing your US citizenship (‘Expatriation’)
Some US persons who for example, have no intention of ever living in the US, may consider expatriating, i.e. renouncing their US citizenship and giving-up their US passport. This means that they would no longer be a US person from the date that of expatriation. In the year of expatriation, they would be required to report their worldwide income on a US tax return up to the date that they expatriated and only income from US sources thereafter. Once expatriated, they should not be required to file future US tax returns (unless they are in receipt of certain US sourced income).
Anyone considering expatriating should also seek US immigration advice. In addition, they will have needed to file US tax returns for the previous 5 years before the year in which expatriation occurs. Therefore, for someone looking to expatriate during 2023, US tax returns from 2018 through to 2022 should be submitted.
Please note, where an individual’s net worth exceeds $2 million, an exit tax might apply as they will be deemed to have disposed of their worldwide assets on the day before expatriation. If the resulting gain exceeds a certain limit (revised annually) then actual US capital gains tax could become due. Therefore, this may require careful consideration prior to renunciation.
Tax Advisory Partnership (TAP) regularly advises US persons on their US tax filing responsibilities under the Streamlined program and otherwise generally. We can assist with the preparation of US tax returns and the foreign bank reports. We can also help relevant individuals to consider the options available and we can introduce US specialist lawyers to advise on all matters related to expatriation, as appropriate.
If you would like to discuss US tax compliance generally or the Streamlined program or expatriation, please complete the enquiry form on this page to arrange a free initial consultation.