Streamlined Filing Compliance Procedures Explained: Catch Up on U.S. Taxes Without Penalties

The Streamlined Filing Compliance Procedures were introduced by the IRS to help U.S. taxpayers living abroad, including expats in New Zealand, become compliant with their U.S. tax obligations without facing hefty penalties, provided that their failure to file was non-willful. Here’s a detailed breakdown of everything you need to know about these procedures:

Overview of Streamlined Filing Compliance Procedures

The Streamlined Filing Compliance Procedures are designed for U.S. citizens, resident aliens, and certain non-resident U.S. taxpayers who have not met their U.S. tax filing obligations but whose failure to comply was non-willful. These procedures allow eligible taxpayers to catch up on their tax filings without being subjected to severe penalties, provided they meet specific eligibility criteria.

Eligibility Requirements

To qualify for the Streamlined Filing Compliance Procedures, you must meet specific criteria that demonstrate your previous failure to file U.S. taxes was non-willful. The IRS defines non-willful conduct as actions resulting from negligence, inadvertence, or a genuine misunderstanding of your tax obligations. This is crucial, as the streamlined procedures are intended to help taxpayers who unintentionally fell out of compliance, not those who deliberately evaded taxes.

For U.S. expats, another key requirement is residency status. You must have spent at least 330 full days outside the U.S. in one of the three most recent tax years to qualify for the foreign version of the procedures. Additionally, all outstanding U.S. tax returns and Foreign Bank Account Reports (FBARs) for the past three years and six years, respectively, must be filed to meet compliance. Finally, a written statement must be submitted certifying that the failure to file was non-willful.

To qualify for the Streamlined Filing Compliance Procedures, you must meet the following key requirements:

Non-Willful Conduct

The IRS defines non-willful conduct as instances where a taxpayer’s failure to comply with tax obligations arises from negligence, inadvertence, or a good faith misunderstanding of the law. In this context, non-willful behavior means that the taxpayer did not deliberately attempt to evade taxes or hide income. For example, many U.S. expats are unaware of the requirement to file U.S. tax returns while living abroad or may not fully understand the complexities of reporting foreign income and financial accounts.

Non-willful conduct can result from simple oversight, lack of familiarity with U.S. tax laws, or misunderstanding how foreign income is treated under U.S. tax regulations. To qualify for programs such as the Streamlined Filing Compliance Procedures, a taxpayer must demonstrate that their failure to meet tax filing requirements was unintentional and not the result of deliberate actions to avoid taxes or evade the law.

Non-U.S. Residency for Streamlined Foreign Offshore Procedure

To meet the non-residency requirement for the Streamlined Filing Compliance Procedures, you must have been physically present outside the U.S. for at least 330 full days during one of the three most recent tax years for which the tax return due date, or an extended due date, has passed. This test is crucial for determining whether you qualify for the foreign version of the streamlined procedures, which is designed for U.S. taxpayers residing abroad.

For U.S. expats living in New Zealand, meeting this requirement is often straightforward, as long-term residence in New Zealand typically ensures that the 330-day threshold is met. This allows such expats to access the more favorable terms of the foreign version of the procedures, which offers significant relief from penalties. The streamlined process is tailored to accommodate the needs of U.S. taxpayers living overseas, helping them come into compliance without facing severe financial consequences.

U.S. Residency for Streamlined Domestic Offshore Procedure

If you are residing in the U.S. but have unreported foreign income or undisclosed foreign financial accounts, you may qualify for the domestic version of the Streamlined Filing Compliance Procedures. Unlike the foreign version, the domestic procedure involves a 5% penalty on the highest aggregate balance of unreported foreign financial assets during the covered period. While the domestic version does not offer the same penalty relief as the foreign option, it still provides a more favorable resolution compared to other IRS programs for non-compliance, allowing individuals to come into compliance with reduced penalties.

Streamlined Foreign Offshore Procedures vs. Domestic Offshore Procedures

There are two versions of the streamlined procedures: the Streamlined Foreign Offshore Procedures (SFOP) and the Streamlined Domestic Offshore Procedures (SDOP). Expats in New Zealand will generally use the Foreign Offshore Procedures unless they have moved back to the U.S.

Streamlined Foreign Offshore Procedures (SFOP)

This is specifically designed for U.S. expats who reside outside the U.S. (like in New Zealand) and have unreported foreign income or financial accounts. The key benefit is that no penalties are imposed for qualifying expats.

Streamlined Domestic Offshore Procedures (SDOP)

This procedure is for U.S. residents (those living in the U.S. who have undisclosed foreign accounts or income). Under this procedure, a 5% penalty on the highest balance of unreported foreign accounts/assets is imposed but is significantly reduced compared to other offshore disclosure programs.

What You Need to File Under the Streamlined Procedures

To use the Streamlined Filing Compliance Procedures, you must submit the following documents:

Three years of past-due tax returns

You need to file the most recent three years of delinquent or amended U.S. tax returns that are required. For each year, you must report your worldwide income, including any income earned in New Zealand. Additionally, you can claim the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) to reduce or eliminate double taxation.

Six years of FBARs (Foreign Bank Account Reports)

If you have had foreign financial accounts with aggregate balances exceeding $10,000 at any point during the calendar year, you must file FinCEN Form 114, commonly known as an FBAR. These reports should be submitted for the most recent six years.

Form 14653 (Certification by U.S. Person Residing Outside of the U.S.)

This form requires you to certify, under penalties of perjury, that your previous failure to comply was non-willful. You must provide an explanation of your conduct, demonstrating that you were unaware of your obligation to file or report foreign accounts.

Relief from Penalties

One of the most significant benefits of the Streamlined Foreign Offshore Procedures is that no penalties are imposed on qualifying individuals. Under normal circumstances, failing to report foreign accounts or file FBARs can result in draconian penalties, including:

• FBAR Penalties: Up to $10,000 per violation (per year), or higher amounts for willful violations.
• Failure-to-File and Failure-to-Pay Penalties: Up to 25% of the tax owed.
• Accuracy-Related Penalties: 20% of the underpayment of tax.

However, with the streamlined procedures, these penalties are completely waived for those using the Streamlined Foreign Offshore Procedures. This offers an immense opportunity for U.S. expats who failed to file their U.S. taxes and FBARs out of ignorance or misunderstanding.

For the Streamlined Domestic Offshore Procedures, the only penalty imposed is a 5% penalty on the highest aggregate balance/value of foreign financial assets that were not properly reported. This is still a significantly reduced penalty compared to other disclosure programs.

IRS Discretion

While the streamlined procedures are designed to help non-willful taxpayers, the IRS reserves the right to deny eligibility if it determines that the taxpayer’s failure to file was willful. If the IRS discovers willful evasion, the taxpayer may be subject to harsher penalties, criminal prosecution, or other enforcement actions.

Tax Liabilities

Under the streamlined procedures, you are still required to pay any taxes owed for the three years of tax returns you file, along with interest. However, the filing of these returns allows you to catch up on your U.S. tax obligations without facing penalties beyond the tax and interest due.

Interaction with the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC)

One of the benefits of filing under the Streamlined Filing Compliance Procedures is the ability to retroactively claim the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC), which can significantly reduce or even eliminate your U.S. tax liability.

Foreign Earned Income Exclusion (FEIE)

You can exclude up to $120,000 of foreign-earned income for the 2023 tax year (with limits for previous years) by filing IRS Form 2555. Many U.S. expats use this to avoid U.S. taxation on income earned in New Zealand.

Foreign Tax Credit (FTC)

You may be able to claim a credit for taxes paid to New Zealand, which can offset U.S. taxes owed on the same income. This can be done by filing IRS Form 1116.

Both methods are tools to avoid double taxation and can be used together or separately depending on your specific tax situation.

Filing Deadlines

While the regular U.S. tax filing deadline is April 15, U.S. expats are granted an automatic two-month extension, pushing their filing deadline to June 15. This extension allows expats additional time to gather the necessary documents and file their U.S. tax returns without the need to request an extension. However, it’s important to note that interest on any taxes owed will still accrue from April 15, even if the filing is delayed.

For those utilizing the Streamlined Filing Compliance Procedures, acting swiftly is essential to avoid further delays in becoming compliant with the IRS. While the streamlined process allows taxpayers to catch up on past-due returns, further delays could complicate compliance efforts or result in additional interest on unpaid taxes.

If additional time is required, expats can apply for a further extension to October 15 by filing IRS Form 4868. This form must be submitted by the June 15 extended deadline, allowing more time to complete and submit the necessary returns.

Why Use Streamlined Procedures?

The Streamlined Filing Compliance Procedures are an invaluable opportunity for U.S. expats in New Zealand who may not have been aware of their filing obligations. By using these procedures, expats can:

• Catch up on filing U.S. tax returns without fear of excessive penalties.
• Report foreign accounts (FBAR and FATCA) and avoid severe financial penalties.
• Become fully compliant with U.S. tax laws and avoid future legal or financial issues with the IRS.
• Claim tax credits and exclusions that can minimize or eliminate their U.S. tax liability.

It’s important to consult a tax advisor or expert in expat tax compliance before proceeding, as they can help ensure you meet the eligibility criteria and provide guidance on how to navigate the process effectively.

Final Thoughts

The Streamlined Filing Compliance Procedures offer a vital solution for U.S. expats who have fallen behind on their tax obligations while living abroad, including those in New Zealand. These procedures are specifically designed to address non-willful compliance issues, where individuals unintentionally failed to meet U.S. tax filing requirements. By utilizing this streamlined process, expats can become fully compliant with the IRS without facing hefty financial penalties or the risk of legal action.

For U.S. expats in New Zealand, it is essential to understand the eligibility criteria and benefits of the Streamlined Filing Compliance Procedures. This program allows expats to catch up on past tax returns, report foreign income, and submit FBARs (Foreign Bank Account Reports) for unreported foreign accounts. The key advantage is that eligible individuals can rectify their tax situation without the severe penalties typically associated with non-compliance.

If you are unsure about your tax status or need help navigating this process, now is the time to take action. Contact U.S. Tax Pros for expert assistance in resolving your U.S. tax issues. Our experienced team will guide you through the Streamlined Filing Compliance Procedures, ensuring your peace of mind and compliance with U.S. tax law.