Navigating the complex landscape of US tax regulations can be daunting, especially for individuals who may have inadvertently found themselves delinquent in their tax filings. Many Americans living abroad, including "accidental Americans"—those who hold US citizenship by birth but have never lived or worked in the US—are often unaware of their obligation to file US tax returns. And this lack of awareness can lead to unfiled returns and substantial penalties.
This article aims to address the challenges delinquent US tax filers face and provide actionable solutions they can take to rectify past oversights. Whether you are an expatriate who missed a filing deadline due to a lack of knowledge or a domestic taxpayer who fell behind due to personal circumstances, understanding your options is crucial. From streamlined procedures designed for non-willful conduct to voluntary disclosure programs aimed at mitigating penalties, we will explore some options for achieving compliance and peace of mind.
Understanding your US tax obligations
While filing a delinquent US income tax return doesn’t incur penalties if no US tax balance is due, failing to file required informational returns, such as Report of FinCEN Form 114 (Foreign Bank and Financial Accounts Report or FBAR), Form 8938 (Statement of Specified Foreign Financial Assets), and others, can lead to severe penalties. According to the Wyden Letter to the IRS on high-income non-filers, the IRS has identified more than 1.4 million high-income non-filers who potentially owe $65.7 billion in back taxes and penalties from 2017-2020 alone. Furthermore, nearly 1,000 taxpayers earning more than $1 million per year failed to file for multiple years, illustrating the scale of the issue.
Understanding the US tax filing obligations for citizens and residents living abroad is essential to avoid potential delinquencies and penalties.
The requirement to file US tax returns on worldwide income
The United States operates on a unique tax system that requires its citizens and residents (including green card holders) to report their worldwide income, regardless of where they live or earn that income. This means that even if you are living and working outside the US, you may still file a US tax return annually.
- Worldwide income: All income from any source, whether earned domestically or internationally, must be reported. This includes wages, salaries, business income, investment income, and rental income, among others.
- Filing thresholds: The requirement to file a tax return depends on your gross income, filing status, and age. The IRS updates these thresholds annually, so it is important to check current requirements each tax year.
Informational reporting requirements
In addition to filing a standard US individual tax return (Form 1040), US taxpayers with financial interests or assets outside of the US must also meet additional informational reporting requirements. These forms are designed to ensure that taxpayers disclose foreign assets and income, thereby preventing tax evasion.
- FBAR: US persons with a financial interest in or signature authority over foreign financial accounts exceeding $10,000 in aggregate at any time during the calendar year must file an FBAR (FinCEN Form 114). This form is submitted electronically through the Financial Crimes Enforcement Network (FinCEN).
- Form 8938 (Statement of Specified Foreign Financial Assets): Taxpayers with specified foreign financial assets exceeding certain thresholds must file Form 8938 with their annual tax return. The thresholds vary based on filing status and whether the taxpayer lives in the US or abroad.
- Other informational forms: Additional forms may be required for specific types of foreign income and assets, such as:
- Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- Form 5471: Information Return of US Persons with Respect to Certain Foreign Corporations
- Form 8865: Return of US Persons with Respect to Certain Foreign Partnerships
- Form 3520 and 3520-A: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Annual Information Return of Foreign Trust With a US Owner
Common misconceptions about US tax filing obligations
Several misconceptions often lead to delinquent tax filings, especially among expatriates and accidental Americans. Understanding and dispelling these misconceptions is crucial for compliance. For US citizens and residents, common misconceptions include:
- Misconception #1: "I don’t need to file because I don’t live in the US." Regardless of your physical residence, as a US citizen or resident (including green card holders), you must file a US income tax return if you meet the income thresholds.
- Misconception #2: "I already pay taxes in my country of residence, so I don’t owe anything to the US." While the US offers foreign tax credits and exclusions (such as the Foreign Earned Income Exclusion) to mitigate double taxation, you must still file a US return and claim these benefits.
- Misconception #3: "I don’t need to report foreign bank accounts under $10,000." While the $10,000 threshold applies to the FBAR filing requirement, the combined value of all your foreign accounts must be considered. Moreover, other forms, like Form 8938, may have different thresholds.
The importance of compliance: penalties of non-compliance
Failing to comply with US tax obligations can result in significant penalties and interest charges, even if no tax is owed. Moreover, non-compliance with foreign informational reporting requirements can lead to substantial fines and, in some cases, criminal prosecution.
Penalties for late filing of the US individual income tax return are based on the amount of unpaid taxes for the year. Individuals may be assessed the following penalties:
Failure-to-file penalty
The failure-to-file penalty is usually 5% of the unpaid taxes for each month (or part of a month) that your return is late. This penalty starts accruing the day after the tax filing due date and will not exceed 25% of your unpaid taxes. If your return is more than 60 days late, there’s also a minimum penalty for late filing. For tax returns required to be filed for calendar year 2024, the minimum penalty is the lesser of $485 or 100% of the tax owed.
Failure-to-pay penalty
The failure-to-pay applies if you don’t pay your US individual income tax when it’s due. This penalty is 0.5% of the unpaid taxes for each month (or part of a month) that your tax remains unpaid. The penalty is limited to 25% of your unpaid taxes. If both the failure-to-file and failure-to-pay penalties apply in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty, effectively limiting that month’s combined penalty to 5%.
Underpayment penalty
The underpayment penalty applies if individuals do not pay enough tax through withholdings or estimated payments during the tax year. This penalty may apply even if the IRS owes you a refund.
Accuracy-related penalties
The IRS imposes an accuracy-related penalty when taxpayers underpay the tax required to be shown on their tax return due to specific behaviors. These behaviors include:
- Negligence: Failing to make a reasonable attempt to follow tax laws during return preparation.
- Disregard of rules or regulations: Carelessly, recklessly, or intentionally ignoring tax rules.
- Substantial understatement of income tax: Understating tax liability by a significant amount.
- Valuation misstatements: Misrepresenting the value or adjusted basis of property claimed on the tax return.
For individuals, the substantial understatement of tax penalty applies if they understate their tax liability by:
- 10% of the tax required to be shown on the return, or
- $5,000 (whichever is greater).
The accuracy-related penalty is 20% of the portion of the tax underpayment that resulted from negligence, disregard, or substantial understatement.
Failure to file informational returns
Significant penalties apply for failing to file required informational forms such as FBAR, Form 8938, and others. For example, the penalty for failing to file an FBAR can start at $10,000 per report and can increase substantially for willful violations, potentially reaching up to 50% of the account balance per year. The current inflation adjusted penalty for failure to file an FBAR is $16,536 if assessed on or after January 17, 2025.
Interest charges
In addition to penalties, the IRS charges interest on any unpaid taxes from the due date of the return to the date of payment. The interest rate is determined quarterly and is the federal short-term rate plus 3%. Interest compounds daily, adding to the overall amount owed.
Pathways to tax compliance for delinquent filers
For taxpayers who have fallen behind on their US tax obligations, there are several options available to help them become compliant and minimize penalties. Understanding these options and choosing the right one for your circumstance is crucial.
Streamlined filing compliance procedures
The IRS offers streamlined procedures for taxpayers who fail to report foreign financial assets and pay tax due on the income generated by those assets. This option is designed for individuals whose failure to comply was non-willful, meaning it was not due to negligence, inadvertence, or a good faith misunderstanding of the requirements. It is important to note that taxpayers under civil examination by the IRS or under criminal investigation are ineligible for the streamlined procedures.
- Streamlined foreign offshore procedures: This is for US taxpayers residing outside the United States. To qualify, taxpayers must:
- File delinquent or amended tax returns for the last three years along with any delinquent information returns (e.g., Forms 3520, 5471, 8938).
- File delinquent FBARs for the last six years.
- Pay all taxes and interest due with the submission.
- Certify that their failure to file was non-willful. If a taxpayer previously became aware of their non-compliance and did not act immediately to rectify the position they cannot use this compliance procedure.
By utilizing and meeting the requirements of the streamlined foreign offshore procedures, you can effectively sidestep penalties such as failure-to-file, failure-to-pay, accuracy-related, and most importantly, penalties for not filing information returns on time.
- Streamlined domestic offshore procedures: This is for US taxpayers residing in the United States. These IRS procedures were designed for taxpayers who do not qualify as foreign residents, are non-willful, and filed their original tax returns timely. Under these procedures, a taxpayer is liable for a 5% Title 26 Miscellaneous Offshore Penalty in lieu of all the other delinquent FBAR and Foreign Account Tax Compliance Act (FATCA) penalties.
IRS voluntary disclosure program
For taxpayers whose non-compliance may be considered willful or fraudulent, the IRS voluntary disclosure program offers a way to come forward and mitigate the risk of criminal prosecution. This program is intended for those who deliberately failed to file tax returns or report income. Eligibility and process for this approach includes:
- Taxpayers must submit a pre-clearance request to determine eligibility, followed by a detailed narrative outlining the facts and circumstances of the non-compliance, including assets, entities, related parties, and professional advisors involved.
- Typically, taxpayers are required to submit tax returns for the most recent six tax years, though the IRS examiner may extend this period in certain cases.
- In addition to paying any taxes, penalties, and interest owed, taxpayers may also face civil fraud penalties for failing to file income tax returns. The civil fraud penalty is typically 75% of the highest amount of tax due in any year within the six-year assessment period.
- Penalties for willful failure to file FBARs may also be imposed, with penalties ranging from $100,000 per report or 50% of the account's maximum value, whichever is greater. The current inflation adjusted penalty for the willful violation is $165,353 if assessed on or after January 17, 2025.
- Notably, the IRS will not automatically issue penalties for failure to file information reporting returns (e.g., Form 5471) under the voluntary disclosure program.
Given the complexity of the program, it is highly recommended that individuals seeking compliance under the IRS voluntary disclosure program work with a qualified tax accountant and a US attorney to navigate the process effectively.
Delinquent international information return submission procedures
If you have identified the need to file delinquent international information returns, are not under a civil examination or criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent returns, you may file the delinquent returns under delinquent international information return submission procedures by following these steps:
- Attach delinquent returns: All delinquent international information returns, except Forms 3520 and 3520-A, should be attached to an amended tax return. These should be filed according to the instructions applicable to the amended return.
- Specific forms 3520 and 3520-A: These forms should be filed according to their specific instructions.
- Include reasonable cause statements: Taxpayers should attach a reasonable cause statement to each delinquent information return explaining why they failed to file on time. During processing, penalties may be assessed without considering the attached reasonable cause statement. Therefore, taxpayers may need to re-submit the reasonable cause statement to the IRS and request penalty abatement.
Information returns filed with amended returns will not be automatically subject to audit. However, you may be selected for audit through the IRS's existing audit selection process for any tax or information returns.
Delinquent FBAR submission procedures
If you failed to file required FBARs but do not need to use the voluntary disclosure or streamlined filing compliance procedures, and you are not under examination or criminal investigation related to the delinquency, you can file delinquent FBARs following these steps:
- Review the instructions: Ensure you understand the filing requirements.
- Include a statement: Explain why you are filing the FBARs late.
- File electronically: File all FBARs electronically using FinCEN’s BSA E-Filing System. On the cover page of the electronic form, select a reason for filing late.
- Alternative to electronic filing: If you are unable to file electronically, inquire with FinCEN about alternative options.
The IRS will not impose penalties for failure to file delinquent FBARs if you properly reported and paid tax on the income from the foreign accounts, and you have not previously been contacted about an examination or request for the delinquent FBARs.
As with delinquent information returns, filing late FBARs does not automatically trigger an audit, but you may be selected through existing processes for any tax or information returns.
Quiet disclosure
Some taxpayers choose to come into compliance by filing amended tax returns with the IRS — a practice commonly referred to as a “quiet disclosure.” This involves correcting prior-year filings without formally entering the IRS’s voluntary disclosure program or streamlined filing compliance procedures.
While this approach may seem appealing due to its lower upfront cost and quicker process, it carries significant risks. The IRS has enhanced its use of artificial intelligence, allowing it to efficiently scan and analyze large datasets—including amended returns and foreign account reports—for signs of noncompliance or hidden income.
Unlike official disclosure programs, quiet disclosures offer no legal safeguards—there’s no protection from penalties or prosecution.
Although there may be cases where amending a return is appropriate, taxpayers with substantial unreported income or foreign investments should seek guidance from a qualified legal counsel, who can provide legal protections and help navigate the complexities of IRS compliance.
Actionable steps to address tax delinquencies
Addressing delinquent tax filings promptly is crucial to minimize penalties and avoid further complications. Here are actionable steps you can take to start resolving your tax issues:
1. Assess your situation
Begin by thoroughly evaluating your current tax status. Gather all relevant documentation, including past tax returns, financial statements, and foreign financial account information.
- Identify missing returns: Determine which years you have not filed returns or submitted required informational reports (e.g., FBAR, Form 8938).
- Calculate potential liabilities: Estimate the taxes, interest, and penalties you might owe for delinquent filings.
2. Seek professional assistance
When addressing delinquent tax filings—especially those involving substantial unreported income, foreign assets, or potential exposure to IRS enforcement—it is highly advisable to seek professional assistance by engaging both a qualified tax professional and legal counsel.
This joint approach offers several key advantages:
- Legal protection: Only a tax attorney can provide attorney-client privilege, which protects sensitive communications from disclosure. This legal safeguard is not available through CPAs or other tax professionals.
- Combined expertise: A tax professional brings deep knowledge of tax compliance and financial reporting, while a tax attorney contributes legal insight into IRS procedures, civil and criminal exposure, and strategic resolution options. Together, they offer a comprehensive and coordinated solution.
- Risk mitigation: Delinquent filings can trigger audits, penalties, or even criminal investigations. A tax attorney can assess legal risks and recommend the safest course of action, while the tax professional ensures accurate and complete filings.
- Navigating IRS programs: If you are considering the streamlined filing compliance procedures or the voluntary disclosure program, legal counsel is essential to ensure eligibility and proper execution. The tax professional supports this process by preparing the necessary financial documentation.
- Stronger representation: In the event of an audit or IRS inquiry, having both a tax professional and a tax attorney ensures you are well-represented from both a financial and legal standpoint.
3. Choose the appropriate compliance path
Based on your assessment, select the most suitable option for becoming compliant. Consider the nature of your non-compliance (willful or non-willful) and the specific requirements of each option.
- Streamlined filing compliance procedures
- IRS voluntary disclosure program
- Delinquent international information return submission procedures
- Delinquent FBAR submission procedures
- Quiet disclosure (with guidance from a qualified tax attorney)
4. Gather required documentation
Collect all necessary documentation to support your compliance efforts. This includes:
- Tax documents: W-2s, 1099s, past tax returns, and any other relevant tax documents
- Foreign account information: Bank statements, account balances, and details of foreign financial assets
- Supporting evidence: Medical records, correspondence, or other documents that explain your failure to file on time
5. Prepare and file delinquent returns
Prepare and file all delinquent tax returns and informational reports. Ensure accuracy to avoid further penalties. Pay special attention to the various requirements of the process you plan to take.
6. Pay any taxes and interest due
Calculate the total amount of taxes and interest owed and make the necessary payments to the IRS. This helps to stop further accrual of interest and reduces the financial burden.
7. Submit all required forms and documentation
Ensure that all required forms, certifications, and supporting documents are submitted correctly. This includes the necessary statements for non-willful conduct under the streamlined procedures or a reasonable cause statement under delinquent international information return submission procedures or delinquent FBAR submission procedures.
Peace of mind through tax compliance
Navigating the complexities of US tax compliance, especially for delinquent filers, can be overwhelming. However, understanding your obligations and consequences of non-compliance is the first step toward resolving your tax issues. By taking proactive steps, gathering the necessary documentation, and seeking professional assistance, you can address past oversights and achieve compliance with US tax laws. The sooner you address your tax delinquency, the better your chances of minimizing penalties and avoiding further complications.
If you find yourself overwhelmed by US tax delinquency issues, know that you don't have to navigate it alone. Our team of experienced tax professionals is here to guide you through the process of resolving your tax situation. Whether you require assistance with streamlined filing procedures, voluntary disclosures, or any other aspect of achieving compliance, we have the expertise to help you take the necessary steps with confidence. Contact us to explore your options and embark on the path towards lasting tax compliance and peace of mind.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.
