For US expats who are behind on their taxes, the streamlined filing process offers a valuable opportunity to get back on track and avoid hefty penalties. If you’re a US citizen living abroad and haven’t filed your taxes in a while, or if you’ve missed reporting foreign income, the IRS provides a path for you to become compliant with significantly reduced penalties under the Streamlined Filing Compliance Procedures. But how much can you save? Here’s a breakdown of the potential savings and how it works.
What is the Streamlined Filing Procedure?
The Streamlined Filing Procedure is a program designed by the IRS to help US taxpayers, come into compliance with their tax filing obligations. This program is specifically for taxpayers who have not willfully evaded their taxes and who are trying to rectify past filing mistakes.
There are two key components of the program:
- Streamlined Domestic Offshore Procedures (SDOP): For those living in the US.
- Streamlined Foreign Offshore Procedures (SFOP): For US citizens and residents living abroad.
Under both options, taxpayers can file their late returns and pay any outstanding taxes while minimizing penalties. This procedure is especially beneficial for those who have foreign accounts, income, or assets that have not been disclosed.
Penalty Relief Under Streamlined Filing
One of the biggest advantages of the Streamlined Filing Procedure is the relief it offers from certain penalties that could otherwise be imposed. Specifically, it reduces or eliminates the following penalties:
Failure-to-File Penalty:
If you fail to file your tax return by the due date, the IRS typically charges a failure-to-file penalty. This penalty is usually 5% of the unpaid taxes for each month your return is late, up to a maximum of 25%. However, under the Streamlined Filing Procedure, this penalty is waived for eligible taxpayers.
Failure-to-Pay Penalty:
The failure-to-pay penalty is another common penalty for those who owe taxes but don’t pay on time. This penalty is generally 0.5% of the unpaid taxes each month, up to a maximum of 25%. Under the streamlined procedure, this penalty is reduced for taxpayers who are compliant under the program.
Foreign Bank Account Reporting (FBAR) Penalty:
For US expats, one of the most significant penalties is related to the Foreign Bank Account Report (FBAR). US citizens are required to report foreign financial accounts with balances over $10,000, and failure to do so can result in severe penalties. Under the Streamlined Filing Procedure, taxpayers are generally subject to a reduced FBAR penalty of 0% for non-willful violations. This is a massive relief compared to the potential $10,000 per violation for non-willful infractions and more severe penalties for willful violations.
Accuracy-Related Penalty:
In cases where there are errors on a tax return, the IRS may impose an accuracy-related penalty. This penalty is generally 20% of the underpayment due to negligence or disregard of tax rules. Under the Streamlined Filing Procedure, taxpayers are often able to avoid this penalty, as long as they are not willfully violating tax laws.
How much can you save by filing under the Streamlined Amnesty Program?
The amount you can save through penalty relief under the Streamlined Filing Procedure depends on your specific situation, including how many years of returns are involved, how much tax is owed, and whether penalties for FBAR violations are applicable. However, let’s break it down:
Failure-to-File Penalty Savings: If you’re late on your tax return, the 5% monthly penalty could quickly add up. For example, a $10,000 tax liability could result in $500 per month in penalties. With the Streamlined Filing Procedure, this penalty is waived.
Failure-to-Pay Penalty Savings: The typical 0.5% per month could amount to $50 per month on the same $10,000 liability. With the streamlined tax amnesty program, you may pay less or no penalty at all.
FBAR Penalty Savings: FBAR penalties can be as high as $10,000 per year per account for non-willful violations. If you have multiple accounts that were not reported, this penalty can be catastrophic. Under the Streamlined Filing Procedure, the 0% penalty on non-willful violations saves you potentially tens of thousands of dollars.
Accuracy-Related Penalty Savings: If you’ve made errors on your tax return, the 20% accuracy-related penalty could add up quickly. With the Streamlined Filing Procedure, this penalty is generally waived, saving you a significant portion of your liability.
How to Qualify for Streamlined Filing?
To be eligible for the Streamlined Filing Procedure, you must meet certain criteria. These include:
- Non-Willful Conduct: The taxpayer must demonstrate that their failure to file or report foreign income/assets was non-willful. Non-willful conduct is generally defined as an honest mistake or oversight rather than intentional wrongdoing.
- Foreign Residency: The taxpayer must have been out of the US for at least 330 days in one of the last three years.
- Three Years of Tax Returns: Taxpayers must file the last three years of US income tax returns, including all necessary forms (e.g., Form 1040, Form 8938 for reporting foreign assets, etc.).
- Six Years of FBAR: Taxpayers must submit delinquent FBARs for the last six years in which they should have filed.
- Full Payment of Taxes Owed: The taxpayer must pay any taxes owed, including interest, along with the tax returns they submit under the program.
How Streamlined Filing Saves Time and Money
In addition to the financial savings, the Streamlined Filing Procedure offers significant peace of mind. The IRS has established a clear and manageable process for expats to become compliant with US tax laws. Expats no longer need to worry about facing penalties that could cripple their finances or face criminal prosecution for past mistakes.
Streamlined filing also reduces the burden of having to spend time and resources contesting penalties or participating in lengthy audits. With this option, expats can quickly catch up on missed filings and move forward with their tax obligations without unnecessary hurdles.
The Streamlined Filing Compliance Procedures offer significant relief for Americans living abroad who may have fallen behind on their tax and reporting obligations. By reducing or eliminating penalties for non-willful violations, this program provides a way to get back on track with minimal financial consequences. If you’re an expat facing tax issues, it’s crucial to explore whether you qualify for Streamlined Filing to potentially save on hefty penalties and regain compliance with the IRS.
