Important note on streamlined filing compliance procedures -- This article specifically discusses the streamlined foreign procedures, not the domestic procedures. To qualify for the foreign procedures, a taxpayer must meet the IRS’s non-residency requirement. For a US citizen, this means that in one of the past three years for which the original or properly extended US tax return due date has passed, they did not have a US residence and were physically present outside the US for at least 330 full days.
US citizens and permanent residents (green card holders) working outside the United States generally are still required to file annual US tax returns, and the IRS is constantly updating its technology to better locate non-filing taxpayers and bring them into compliance. However, in addition to increasing its enforcement capabilities, the IRS has also taken steps to encourage non-filers to come into compliance by waiving penalties for those taxpayers eligible to take advantage of the streamlined filing compliance procedures (streamlined procedures).
Although required to file US returns, taxpayers working abroad may not ultimately have a tax liability on their US tax filings. These taxpayers can potentially use foreign tax credits paid or exclusions to lower or eliminate their US tax liability on income earned outside of the US.
Who needs to file a return?
Generally, all US citizens and permanent residents are required to file a US federal form 1040 as if they were still residing in the United States. However, a US taxpayer working internationally may not need to file if they do not meet the IRS’s gross annual income threshold. For 2024, the threshold is $14,600 for an individual taxpayer and $29,200 for married taxpayers filing jointly. For taxpayers over the age of 65, the thresholds are slightly higher.
Self-employed individuals cannot take advantage of the IRS thresholds and are required to file a return if their net earnings total $400 or more.
Additional US federal filing requirements
US taxpayers with foreign financial assets must navigate a complex web of reporting requirements to remain compliant. These additional US federal filing obligations are often triggered when an individual holds specific types of foreign financial assets or engage in cross-border financial transactions. Below are some of the key forms required and the circumstances under which they might apply:
- FinCEN 114 (FBAR) – Report of Foreign Bank and Financial Accounts
Required if the aggregate value of foreign financial accounts exceeds $10,000 at any point during the calendar year. This form must be filed separately from the tax return and is critical for disclosing foreign bank and specified financial accounts to the US Treasury. - Form 8938 – Statement of Specified Foreign Financial Assets
Mandated for US taxpayers who meet certain thresholds for specified foreign assets, such as foreign bank accounts, financial instruments, or interests in foreign entities. The filing thresholds vary depending on filing status and residency. - Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company (PFIC)
Applies to US taxpayers who own shares in a PFIC or qualified electing fund. Reporting ensures proper taxation of income generated by these investments. - Form 5471 – Information Return of US Persons with Respect to Certain Foreign Corporations
Required for US taxpayers who are officers, directors, or shareholders in certain foreign corporations. This form provides detailed information about ownership and financial activities. - Form 926 – Return by a US Transferor of Property to a Foreign Corporation
Necessary when US persons transfer property to foreign corporations, documenting the transaction for compliance and tax purposes. - Form 8858 – Information Return of US Persons with Respect to Foreign Disregarded Entities and Foreign Branches
Focuses on US persons with ownership in foreign disregarded entities (FDEs) or foreign branches, requiring detailed reporting on these operations. - Form 8865 – Return of US Persons with Respect to Certain Foreign Partnerships
Applicable when US taxpayers have interests in foreign partnerships that meet specified ownership thresholds or transaction types. - Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
Required for US taxpayers involved in transactions with foreign trusts or recipients of certain foreign gifts or bequests. - Form 3520-A – Annual Information Return of Foreign Trust with a US Owner
Filed by foreign trusts with US owners, this form provides information on trust activities and ownership.
Understanding the scope of these forms and their triggers is essential to avoiding penalties. Each form carries unique filing thresholds, deadlines, and requirements, emphasizing the need for precise, timely reporting.
For an in-depth guide to these forms, including penalties for non-compliance, thresholds, and tips for efficient management, download our eBook: A Guide to Navigating International Reporting Obligations for US Taxpayers with Foreign Financial Investments.
What happens if a US taxpayer working abroad fails to file?
A US taxpayer whose tax home is outside the United States on the initial due date, receives an automatic two-month filing extension, typically to June 15. Late-filing penalties can apply if there is a balance due on the return and the return has not been timely filed. Unless an additional filing extension has been requested, late filing and payment penalties are typically calculated at up to 5 percent per month on the outstanding liability and can continue to accrue until the penalty reaches 25 percent of the unpaid tax. In addition to the potential penalties, taxpayers are also responsible for paying interest on their unpaid balance from the original due date.
US taxpayers working abroad who fail to file may lose their ability to claim the foreign earned income exclusion or certain elections. These provisions are generally possible only in connection with a timely filed return.
Failure to pay results in additional penalties
The IRS failure to pay penalty is 0.5 percent for late payments, and it may be applied to the same months as the failure to file penalty. However, for those months when both penalties are applied, the failure to file penalty is reduced to 4.5 percent and the total penalty for failing to file and failing to pay still tops out at 5 percent.
If a taxpayer has failed to file and pay for more than five months, the failure to file penalty will have maxed out, but the failure to pay penalty continues to accrue until the tax is paid, topping out at 25 percent of the unpaid tax. The maximum combined penalty for failure to file and pay is 47.5 percent of the tax owed.
IRS offers streamlined procedures to avoid penalties
The IRS has outlined procedures for eligible taxpayers that may allow the individual to come into compliance while avoiding certain penalties, including the failure to file and failure to pay penalties described above.
The program has been made available to any US citizen or resident working outside the United States who has failed to pay all their tax due or to report foreign financial assets as a result of their “non-willful conduct.” The IRS defines non-willful conduct as that which is “due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
To qualify for the streamlined procedures, in part, a taxpayer must certify that they failed to file because of non-willful conduct on the part of the taxpayer. They must also meet a “non-residency” requirement and have failed to report income from a foreign financial asset and pay required US tax due. The taxpayer may also have failed to disclose their financial account on an FBAR.
Under these streamlined procedures, the taxpayer must file original or amended US federal returns for each of the most recent three years and file any required delinquent FBARs for each of the most recent six years for which the filing due dates have passed. The full amount of tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.
If the IRS finds a taxpayer is eligible for the program, then many of the standard non-filing penalties will not apply. However, previously assessed penalties or penalties assessed, associated with the normal filing of a deficient tax return, may still apply.
Because of the complicated nature of the streamlined procedures, taxpayers who wish to participate in the program should seek the assistance of a mobility tax professional to help guide them through the process.
What happens if the IRS finds you have not filed
If the IRS locates a US citizen or permanent resident working abroad who has not filed returns, the IRS will contact the taxpayer. In general, the IRS will first contact the taxpayer by a letter delivered by the US postal service. Taxpayers are often asked to respond to this letter within 30 days, but they usually do not face criminal charges at this point. Failure to respond to the letter could result in a determination of willful disregard to file and/or tax evasion with consequences including criminal penalties. A taxpayer who has been contacted by the IRS for failing to file should contact a mobility tax specialist to ensure they are taking the steps necessary to comply and prevent the accrual of additional interest and penalties and protect their assets.
Failing to file a tax return can lead to serious financial and legal consequences, including property seizure, wage garnishment, and even criminal charges. That’s why it’s essential for taxpayers to understand their filing requirements, rights, and available options.
For US persons living and working abroad, addressing delinquent filings promptly is critical. A mobility tax professional can guide you through your obligations and help you take the right steps.
At GTN, we’re here to help you navigate these complexities and get back on track with your US tax filings. Contact us today to discuss your situation and learn how we can support you.
The information provided in this newsletter article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.
