The Streamlined Procedure for U.S. Expats

Introduction

Many U.S. expatriates are unaware of their tax obligations while living abroad, often assuming that they do not need to file a U.S. tax return if they pay taxes in their country of residence. However, the U.S. imposes citizenship-based taxation, meaning U.S. citizens and Green Card holders must report their worldwide income annually, regardless of where they live.

To help non-compliant expats get back on track without severe penalties, the IRS introduced the Streamlined Filing Compliance Procedure. This program allows eligible taxpayers to catch up on their U.S. tax filings and Foreign Bank Account Reports (FBARs) without facing harsh fines.

This article explains who qualifies, how to apply, and what to expect when using the Streamlined Filing Compliance Procedure.

Who is Eligible for the Streamlined Procedure?

To qualify for the Streamlined Filing Compliance Procedure, U.S. expats must meet the following conditions:

1. Valid Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
   • You must have a valid SSN or ITIN to participate in the program.
2. Non-Willful Conduct
   • Your failure to file U.S. tax returns must be due to non-willful reasons, meaning you were unaware of your tax obligations rather than deliberately avoiding taxes.
3. Residency Requirements
   • You must have lived outside the U.S. for at least 330 days in one of the past three years.
   • You must not have maintained a home within the U.S. during this period.
4. Filing History
   • You must not have filed U.S. federal tax returns for the past three years, OR
   • If you previously filed tax returns, they must contain errors or omissions that need correction.

If you meet these criteria, you can use the Streamlined Procedure to become compliant with IRS regulations.

Who is Not Eligible for the Streamlined Procedure?

You do not qualify for the Streamlined Filing Compliance Procedure if:

• The IRS has already initiated an audit or examination of your tax returns.
• You are under criminal investigation by the IRS.

If you receive an IRS letter stating that your tax returns are under examination, consult a tax professional to determine alternative options.

How to Apply for the Streamlined Procedure

To catch up on U.S. tax obligations through the Streamlined Procedure, applicants must submit:

1. The last three years of U.S. federal tax returns (Form 1040)
2. The last six years of Foreign Bank Account Reports (FBAR - Form 114)
3. Form 14653 (Certification by a U.S. Person Residing Outside the U.S.)

Key Steps in Filing

1. Gather All Necessary Documents
   • Collect financial records, wage statements, and foreign tax reports.
2. Prepare and File Tax Returns
   • File three years of delinquent or amended tax returns using Form 1040.
   • Claim any applicable tax credits or exclusions (Foreign Tax Credit, Foreign Earned Income Exclusion, etc.).
3. File FBAR Reports
   • Submit six years of FBARs (Form 114) to FinCEN if you had more than $10,000 in foreign accounts at any time during a tax year.
4. Complete Form 14653
   • Certify that your failure to file was non-willful.
   • Sign and attach this form to your tax return submission.
5. Mail Your Tax Returns to the IRS
   • Write "Streamlined Foreign Offshore" in red ink at the top of Form 1040 and Form 14653.
   • Submit the completed documents to:
   • IRS
     3651 S. IH 35
     MS 6063 AUSC
     Attn: Streamlined Procedures
     Austin, TX 78741, United States

• Consider using certified mail with tracking for verification.

Foreign Tax Benefits Available Under the Streamlined Procedure

Even when filing under the Streamlined Procedure, U.S. expats can use tax benefits to reduce or eliminate their U.S. tax liability:

• Foreign Earned Income Exclusion (FEIE)
  • Allows expats to exclude up to $126,500 of foreign-earned income from U.S. taxation (2025).
• Foreign Tax Credit (FTC)
  • Offsets U.S. tax liability with foreign income taxes paid to another country.
• Tax Treaties
  • The U.S. has tax treaties with multiple countries to prevent double taxation on income, pensions, and Social Security benefits.

These benefits ensure that expats who already pay foreign taxes do not face additional tax burdens in the U.S.

Penalties for Failing to File U.S. Expat Taxes

Without the Streamlined Procedure, expats may face substantial penalties for failing to file U.S. tax returns or FBAR reports

Failure to File and Failure to Pay Penalties

• Failure to File Penalty:
  • 5% of unpaid taxes per month, up to 25% of total unpaid taxes.
• Failure to Pay Penalty:
  • 0.5% per month on unpaid taxes, up to 25% of total unpaid taxes.

FBAR and FATCA Penalties

• Non-Willful FBAR Violations:
  • Penalties of up to $10,000 per violation.
• Willful FBAR Violations:
  • The greater of $100,000 or 50% of the account balance per violation.
• Failure to File FATCA Form 8938:
  • $10,000 fine for non-compliance.
  • Additional penalties of $10,000 per 30 days (up to $50,000) for continued failure to file.

These penalties highlight the importance of becoming tax-compliant as soon as possible.

Passport Revocation Due to Unpaid Taxes

Expats with unpaid federal tax debts over $64,000 may have their U.S. passport revoked or renewal denied.

If you receive IRS Letter 6152, act immediately by contacting the IRS to resolve your tax debt before losing your passport.

Alternative Penalty Relief: First Time Penalty Abatement

If you receive an IRS notice regarding overdue tax returns, you may qualify for the First Time Penalty Abatement Program, provided that:

• You had no previous penalties in the last three years.
• You filed all required returns or have an approved extension.
• You have paid or arranged to pay any outstanding tax.

This program can waive penalties for first-time non-compliant taxpayers.

Conclusion

The Streamlined Filing Compliance Procedure is a lifeline for U.S. expats who unknowingly failed to file their U.S. taxes. By catching up without penalties, expats can achieve tax compliance and avoid future legal or financial issues.

To ensure a smooth and penalty-free filing process, Tax Partners offers expert assistance in handling the Streamlined Procedure, FBAR reporting, and expat tax compliance.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.