Simple Guide for US Expats Needing to File Back Taxes

US Expatriates should consider their available options for catching up on back taxes, especially the Streamlined Foreign Offshore Procedures. Explore your options.

Important note: The information presented here is extremely general and is only meant as an unofficial introduction for expats to read about getting caught up on their taxes. Deciding how to get caught up on filing US taxes is complicated, and the correct answers depend on many factors. We strongly recommend that you hire a qualified tax professional, such as a CPA or an EA, to guide you through your options. Choosing wrongly could lead to massive penalties and/or other expensive or unpleasant situations. The information presented here is not adequate to make prudent decisions on how to get caught up.

US Expatriate Back Taxes and the Streamlined Foreign Offshore Procedure

Many expats have not filed their US taxes. The IRS and the policy makers are aware of this. Some expats have not filed for years, but do not actually owe any tax. Taxpayers in this group may face the expenses and time costs from recovering years of records and from filing tax returns for all of those years.

Other expats owe the IRS years of extremely complex informational forms, and they face penalties in the tens of thousands for not having filed them.

For both of these groups, the IRS developed the Streamlined Foreign Offshore Procedures (SOP, for short) to help these US Taxpayers get caught up without basically destroying their lives. The SOP also helps taxpayers file FBAR reports – which are required to be filed each year when a US Person surpasses a threshold (currently $10,000) in value of non-US bank accounts and other financial interests (and in some additional cases).

Back Taxes and Qualifying for the Streamlined Foreign Offshore Procedures

To qualify for the SOP, a taxpayer cannot currently be under examination by the IRS. If they are already looking at you – then it is generally too late for this procedure.

The Streamlined Foreign Offshore Procedure is only available for taxpayers who did not willfully disregard the tax code. Non-willful conduct must be certified by the filer.

Finally, the offshore procedures can only be followed by those spending a minimum amount of time in the United States in the appropriate years.

How to File Back Taxes Under the Streamlined Foreign Offshore Procedures

Expats must file three years of the most recent required income tax returns and six years of the most recent required FBAR reports. Income tax returns must include all applicable informational returns such as the “Statement of Specified Foreign Assets” and the “Controlled Foreign Corporation” forms. They must also complete the non-willful certification statement. All of these filing must be submitted by paper and “snail mail” to a dedicated mailing address. There are other filing requirements as well.

The SOP Favors Expatriates That Have not Filed

In most cases (but not all cases) filing under these procedures will help to prevent taxpayers from owing late-filing penalties. Tax returns that were not filed prior to the most recent three years may also be completely forgiven of the taxpayer. The same goes for FBAR reports that go back more than the recent six years.

For many taxpayers, the SOP may be an extremely generous deal that the IRS is offering.

Why Wouldn’t a Taxpayer Owing Back Taxes File Under the SOP if They Qualify?

Certifying non-willful conduct for taxpayers lacking reasonable cause might be a really bad idea. This may be against the law and possibly can be considered as a criminal act. There may be other specific and complex reasons why an expat who owes back taxes might not choose this option.

If you would like to hire us to get you caught up using the streamlined offshore procedures, click here.

The Offshore Voluntary Disclosure Program for Ex Patriots and Back Taxes

expatriate back taxes

Depending on the situation, an expat may choose to file under another IRS late filing relief procedure called the Offshore Voluntary Disclosure Program. This is usually the best option when the taxpayer cannot certify that their delinquencies were non-willful. The main requirement of this procedure as that you “really must tell the truth this time”. It also implies that you will tell the “whole truth” and not lie by omission.

In most cases, the OVDP offers to waive criminal prosecution in exchange for the taxpayer

  1. Telling the truth
  2. Catching up on complete back taxes filing and financial reports for eight years
  3. Paying back taxes and large penalties

It’s actually a pretty smart program that the IRS developed. It helps expats buy their way out of serious trouble. It’s a win/win because the Treasury gets their money and no one goes to jail.

I want you to like me, but let’s not forget that the Treasury is very much legally entitled to these taxes and that delinquent taxpayers are not being fair to legitimate taxpayers. Maybe they didn’t mean it this way, but these taxpayers may have cheated and lied, and now the IRS may be willing to ignore that in exchange for making good. That sounds like a reasonable deal to me. I’m not judging here – I just want to present both sides.

Other Methods for Expats to Catch Up on Back Taxes

Remember than an expatriate can simply file income tax returns for all of the years that were not filed.

This might be a good idea for US persons living abroad that do not owe any tax and also do not have any additional financial reporting requirements. If there are no overdue FBARs , FATCA reporting, or foreign corporations (etc), then there may not be any penalties for filing late.

Many US persons working overseas will not owe any tax to the US. This might be true thanks to the Foreign Tax Credit or the Foreign Earned Income Exclusion.

It is important to note that claiming the Income Exclusion in late years is not so black and white. This election expires one year after the tax return was due. There is yet another amnesty deal going on to where the IRS has accepted the late filing of these – but only for taxpayers that have come forward voluntarily. Once they come to you asking for returns, it may be too late. The IRS gives guidance about this here (opens in a new window or tab). There are specific procedures for filing this way too. It get’s much more complicated than this, actually. There may be relief granted to late election by request as well.

There are some more aggressive and risky methods out there as well – such as the “clean and quiet” filing method. This is where expats simply “sneak” in their late taxes. Some critics of the other procedures argue that this may be a better way for the IRS to get taxpayers to come forward, and that the OVDP is far to burdensome.

In summary, if you are an expat who owes back taxes or needs to file years of tax returns,  get consultation with a professional. If you would like to hire us to help file your taxes, please visit us at Online Tax Professionals – Expat Tax Services.

Also check out our super simple guide for US Citizens living abroad.

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