United States citizens living abroad generally must file a U.S. income tax return each year, even if they may exclude their income pursuant to the Earned Income Exclusion. In fact, timely filing of tax returns ensures that the benefits of the exclusion may be claimed. If you are a U.S. citizen living abroad and have not filed your U.S. income tax returns, you should file the returns immediately.
Failure to file your income tax returns when due may result in a denial of your passport renewal application, together with other penalties imposed by the Internal Revenue Code.
Foreign tax credits are available to persons who find themselves taxable by more than one country on the same income, in cases where the United States has a treaty with the other taxing country in which you reside. Generally, U.S. citizens living abroad in a treaty country may claim a credit based on the taxes paid to the treaty country on all income except income excluded by the Earned Income Exclusion.
Alternative minimum tax is a tax calculated on income without giving regard to certain preference amounts, including the Earned Income Exclusion. As a result of the workings of AMT, and the limitation of the AMT foreign tax credit to 90% of the tax paid to the treaty country, some tax may be payable by you even if a combination of the Earned Income Exclusion and the foreign tax credit would otherwise result in no tax payable.
New Developments in International Taxation
Streamlined Filing Compliance Procedure
Effective July 1, 2014, the IRS announced it has expanded the Streamlined Filing Compliance Procedures for non-resident, non-filer taxpayers to include taxpayers who reside in the United States.
There are 4 new options available for U.S taxpayers to become compliant with their past tax and international information reporting regarding foreign financial assets:
1. Offshore Voluntary Disclosed Program
This program is designed for situations where non compliance may have been willful and/or where there is significant unreported income or where sophisticated tax avoidance schemes have been employed.
2. a. Streamlined Foreign Offshore Procedure
For U.S. citizens or permanent residents who live outside the United States.
Taxpayers who remit their outstanding taxes and interest and disclose their foreign accounts will not be charged penalties under this procedure.
Filling requirements:
File delinquent or amended tax returns together with any required international informational returns (e.g. Forms 3520, 3520A, 5471, 5472, 8621 and 8891) for the past 3 years.
File delinquent or amended Foreign Bank and Financial Accounts Report (FBAR’s – FinCEN Form 114) for the past 6 years
Remit full amount of taxes and interest due
Complete and sign a certified statement for persons residing outside of the U.S
2. b. Streamlined Domestic Offshore Procedure
For U.S. citizens or permanent residents who reside within the United States.
Taxpayers who remit their outstanding taxes and interest and disclose their foreign accounts will be charged a reduced “Title 26 miscellaneous offshore penalty” of 5% of their undisclosed foreign financial assets. (Previously, the penalty would have been 27.5%).
Filling requirements:
File amended tax returns together with any required international informational returns (e.g. Forms 3520, 3520A, 5471, 5472, 926, 8621 and 8891) for the past 3 years.
File delinquent or amended Foreign Bank and Financial Accounts Report (FBAR’s – FinCEN Form 114) for the past 6 years
Remit Title 26 miscellaneous 5% offshore penalty
Complete and sign a certified statement for U.S persons residing in the U.S
3. Delinquent Report of Foreign Bank and Financial Accounts Submission Procedures
For taxpayers who have neither additional income to report nor additional tax to report and remit, but:
Have not filed the required Report of Foreign Bank and Financial Accounts Reports (FinCEN Form 114)
Are not currently under either criminal investigation or civil examination by the IRS
Have not been contacted by the IRS regarding delinquent FBAR’s.
4. Delinquent International Information Return Submission Procedures
For taxpayers who have neither additional income to report nor additional tax to report and remit, but:
Have not filed international information returns.
Have reasonable cause for not filing the information returns
Are not currently under either criminal investigation or civil examination by the IRS
Have not been contacted by the IRS regarding delinquent information returns
-5471 – Controlled Foreign Corporations
-3520 – Annual Return to Report Transactions With Foreign Trusts
-3520A – Annual Information Return of Foreign TrustWith a U.S. Owner
-5472 – Information Returnsf a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
-8558 – Information Return of U.S. Persons With Respect to certain Foreign Partnerships
-8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships
-8938 – Statement of Specified Foreign Financial Assets