UPDATED from original published March 2017.
לעברית לחץ כאן
Are you a bit behind on your tax reporting?
Maybe you never knew you were supposed to file, you just read “Intro to Life Abroad”, and now you realize you might have some catching up to do.
Where do you start?
Every week I speak to US citizens living abroad who didn’t realize they were supposed to be filing US income tax returns every year. Many call me because they heard they could get $1,000 from the US government for each child.
Here’s what you should know.
If you have children with social security numbers, you CAN get up to $1,400 per child. (More on refundable credits in a future post.)
What many people don’t realize is that the Child Tax Credit (Schedule 8812) is part of the Form 1040 US Individual Income Tax return. However, your requirement to file a tax return is NOT connected to your eligibility for a refund. If you are a US citizen, you are required to file a tax return in every year when your worldwide income meets the minimum requirement. You can’t just file in the years when you want a refund.
The IRS has a program to “Streamline” the process for getting up-to-date in your reporting. If you have not been reporting foreign accounts on an FBAR or reporting income on a US tax return, and you were not willfully evading taxes, you can file these late reports through the IRS Streamlined Filing Compliance Procedures (also referred to as “amnesty” or “Streamlined” for short), and avoid penalties and criminal investigation.
The Streamlined procedures are available to US citizens and green card holders living worldwide. For the purposes of this article, I will assume you lived outside the US since 2016, though there is also a program for US residents.
What to file:
3 Late US tax returns, or three tax returns amended to report foreign income that was not originally reported. At this time, this will include tax returns for the years 2016, 2017, and 2018. Or whichever of those years a tax return was required based on the thresholds shown HERE.
6 Late FBARs – years 2012-2017 or 2013-2018 (depending on when you read this)– or whichever of those years the aggregate maximum balances of all your foreign financial accounts exceeded $10,000. As detailed HERE. (The years will depend on your timing a other factors.)
IRS Form 14653 certifying that your failure to file tax returns or FBARs was due to non-willful conduct, including a personal statement describing your background and an explanation of why you failed to file timely tax and FBAR reports. Non-willful conduct is defined by the IRS as conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Why use the Streamlined procedures and not just start filing going forward, or file any years missed in a "quiet disclosure"?
The IRS promises any taxpayer who is eligible to use the Streamlined Procedures and who complies with all instructions will not be subject to:
failure-to-file penalties (up to 25% of unpaid taxes)
failure-to-pay penalties (up to 25% of unpaid taxes)
accuracy-related penalties (usually 25% of any underpayment)
information return penalties ($250 - $3,000,000)
FBAR penalties ($10,000-$100,000 or more)
Taxpayers filing within the framework of the Streamline Procedures may still owe tax and interest, but they will have some protection from penalties and the IRS asking for additional tax returns. If you have questions about your eligibility or have concerns that any of your actions or location of accounts may appear "willful", please consult an tax attorney specializing in voluntary disclosure options. A US CPA specializing in foreign taxation can clarify your requirements to file and refer you to an US tax attorney.
For example: If you just realized you needed to file, and you go ahead and file your 2018 tax return and FBAR, you may get a letter from the IRS requesting that you also file reports for previous years. You would now no longer be eligible to file under the protections of the Streamlined Procedures, and you could be subject to the penalties above.
State Amnesty Programs: If you are considered a resident of a US State, or have income from a US state requiring an income tax return, discuss this with a US CPA or EA experienced in multi-year voluntary disclosures. Most states have some form of "amnesty" voluntary disclosure process for filing delinquent tax returns.
Will you owe tax or get a refund?
Very generally speaking, if you live and work in Israel (or any country that withholds taxes at a higher % than your US tax rate), and all your income is either as an employee or from bank interest and investments with tax already withheld, you probably won't owe tax to the US.
If you have children under age 17 with Social Security Numbers (SSNs) and you earned between $2,500-$200,000 you may be able to receive $1,000-$1,400 per child for each year filed (back to 2016, if you file now and the children had SSNs by the due date of the tax return). If you made more than $200,000, you may still get a refund, but it will phase out, based on income and filing status. The above numbers are very general, changed dramatically for the tax year 2018, and are based on your personal situation.
If you or a dependent were studying at least part-time in the first four years of a college degree program, you may also be eligible to receive up to $1,000 per year.
If you had profit from self-employment in 2015-2017, you will probably owe Self-employment (including social security) taxes and interest. Unlike in Israel, paying US social security tax is part of filing your regular income tax return. (Exceptions apply for residents of countries with Social Security totalization agreements with the US. Israel is NOT one of those countries, and paying "Betuach Leumi" - Israel Social Security, will not exempt you from paying into US Social Security.)
If you earned money from a rental property that was exempt from tax filing in your country (such as Israel), you may owe money on this income, because it is not exempt in the US.
Is there a deadline?
The Streamlined procedures is specifically for people who are already late, so there is no exact deadline at this time. However, as time goes on and more people learn about their responsibilities, the bar becomes much higher to demonstrate "non-willfullness." IRS officials are skeptical of anyone's claim that they didn't know they needed to file tax returns or report foreign accounts. If the IRS sent any notices requesting you file (even if you didn't receive them) this can jeopardize your eligibility. Don't think because you are a "small fish" the IRS doesn't care about your reporting. Deadline 1 - Come to them before they find you.
Additionally, the IRS closed the 2014 Offshore Voluntary Disclosure Program on Sept. 28, 2018. While the Streamlined Filing Compliance Procedures remains open, we see this as a sign that it will end at some point. If the end of "Streamlined" filing were to end abruptly, even with 9 months notice, there would not be enough accountants qualified to handle getting everyone into compliance. Therefore, I strongly recommend not waiting until that time. Deadline 2 - Report before the program closes.
For questions or comments, please email me at firstname.lastname@example.org.