businessman and business woman reviewing document

U.S. citizens living abroad have three annual obligations to the IRS. Failure to meet them can lead to IRS examination and serious penalties.

Tax strategies

U.S. Citizens Living Abroad Must Report All Income and Pay Taxes

  • 10/13/2014

If you are a U.S. citizen or resident living in another country, you have three annual obligations to the IRS. Failure to meet these requirements can lead to IRS examination and serious penalties.

As a citizen or resident of the United States, you must:

  • Report all worldwide income on a U.S. income tax return regardless of where you live or where the income is generated
  • Pay U.S. income tax on worldwide income taking into account all deductions, exceptions, and allowable credits for income taxes paid to another country.
  • File informational forms reporting your interests in non-U.S. assets, including, but not limited to, ownership interests or signature or other authority over any non-U.S. financial accounts (including bank, securities, or other types of accounts), if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. This information must be reported using Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

U.S. citizens and residents

You are a U.S. citizen if you were born in this country, in a specific zone outside the country, or you were born outside the country to a parent who is a U.S. citizen (additional steps may be necessary to be deemed a citizen in this instance). Residents of the United States are those who spend a certain number of days in the country during a calendar year and those who have secured lawful permanent residency by obtaining a United States Permanent Resident Card (commonly called a green card).

Green card holders need to be extremely careful. Those living outside the United States who have not formally turned their green card over to the government are still considered legal residents for income tax purposes and are required to meet the three tax obligations.

Penalties for noncompliance

If you do not meet the obligations mentioned above on an annual basis, the IRS considers you tax noncompliant. This can lead to thousands of dollars in penalties and even jail time if not resolved.

Before June 2014, the method for a person living outside the United States to become tax compliant was deemed by many to be unfavorable. But in June 2014, the IRS modified a 2012 limited amnesty program that typically results in a much more favorable conclusion.

The modification, called the Streamlined Foreign Offshore Procedures (Streamlined Program), allows someone living outside the country to certify that they did not willfully fail to report foreign financial assets and to pay all applicable income tax. The Streamlined Program eliminates the previous $1,500 tax threshold and risk assessment process. In addition, it waives all penalties for persons living outside the United States.

Most significantly, participants in the program must certify, under penalties of perjury, that their prior failure to comply with their U.S. tax obligations was not due to any willfulness on their part.

How we can help

Since the passage of the Foreign Account Tax Compliance Act in 2010, the Streamlined Program provides the best alternative for resolving tax noncompliance for citizens and residents living abroad.

If you live outside the United States and you believe you are not meeting your tax obligations, contact a tax professional and qualified attorney to assist with the analysis. If an analysis determines that the nonwillful certification is inappropriate, there are alternatives to seek U.S. tax compliance.