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.
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 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.
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.
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:
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:
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.
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%.
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.
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:
For individuals, the substantial understatement of tax penalty applies if they understate their tax liability by:
The accuracy-related penalty is 20% of the portion of the tax underpayment that resulted from negligence, disregard, or substantial understatement.
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.
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.
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.
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.
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.
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:
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.
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:
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.
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:
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.
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.
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:
Begin by thoroughly evaluating your current tax status. Gather all relevant documentation, including past tax returns, financial statements, and foreign financial account information.
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:
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.
Collect all necessary documentation to support your compliance efforts. This includes:
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.
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.
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.
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.