When U.S. citizens or permanent residents live abroad, they don’t always realize that they are subject to U.S. tax filing requirements. To illustrate how this works, we will examine the fictional case of Noah, a dual Australian/U.S. citizen who has lived in Australia most of his life.
Noah is a young professional who has earned employment and self-employment income over the last several years. In Australia, employers are required to contribute to retirement fund for their employees called a Superannuation accounts; self-employed individuals have a choice of whether to contribute to these accounts or not. Noah had employer-funded Superannuation accounts and bank accounts.
Noah earned enough income to have U.S. income tax filing requirements, and his dual citizenship does not relieve him of any of his U.S. reporting requirements. The aggregate maximum balances for his accounts, including his Superannuation account, eventually exceeded the $10,000 USD threshold for the FBAR (FinCen 114) filing requirement. He did not reach the requirement for additional foreign reporting for specified foreign financial assets (Form 8938, as discussed in our previous blog post) nor does he own any interest or stock of a passive foreign investment company (PFIC).
Although he worked full time for five years, Noah hadn’t filed any U.S. income tax returns or FBARs because he was unaware of his requirement to do so. Fortunately, he qualified to get caught up under the Streamlined Foreign Offshore Procedures, a type of amnesty program offered by the Internal Revenue Service. (See our earlier blog post for more information on Streamlined Filing Compliance Procedures.)
The Streamlined Foreign Offshore Procedures involves filing three years of personal income tax returns and looking back over a six-year period for the FBARs. FBARs only need to be filed for those years in which the filing threshold was reached. In our example, Noah only met the filing threshold for the last two years, so only two years of FBARs needed to be filed. In addition to the income tax returns and FBAR filings, we also had to complete and submit Form 14653 to report the total tax and interest due for these years—there are no penalties under the Foreign Offshore Procedures if the taxpayer qualifies. Only a negligible amount of tax was due with the returns because of Noah’s ability to use the foreign earned income exclusion and foreign tax credits.
If you have further questions about these procedures, please contact our International Tax Group.
By Kimberly Miller