Does that mean that you still must file taxes?
Yes, you do if you’re considered a U.S. Person (US Citizen, Green Card Holders and Resident Aliens). You must file taxes, based on your American Citizenship. You must file your Individual Tax Return annually even if the normal situation would be to apply the treaty to avoid the double taxation and you will not have to pay anything to the IRS, because you have already paid your taxes in the country in which you live and or work. Anyway, not filing taxes in the U.S.A. is a criminal offence. The U.S.A. is the only first world country in the world, that enforces a tax obligation on its citizens, wherever they live or work, and it has some practical consequences.
When did this all start?
The U.S.A. tax obligation over the worldwide income is in effect since around 1860. There was a civil war going on at the time and many people tried to avoid conscription by moving abroad. To punish and discourage these people, a law was passed that would oblige all US citizens to pay taxes, even when they lived abroad. After the war the law was kept. It was the idea that there should be a price to pay, for the honor and privileges that come with an U.S. passport. The law is already in effect for over 100 years, but many people did not know about it (or did not care).
Why is this now becoming an issue?
FATCA (Foreign Account Tax Compliance Act) was introduced in 2010, in order to track down U.S. Citizens that were keeping bank accounts without reporting those to the Tax Authorities. This law forces all financial institutions (banks, insurance companies, pension funds, etcetera) across the globe to provide all information regarding their US clients to the IRS. Further agreements were signed with almost all countries in the world to make sure that the law was being applied, and in the case of Spain and most European countries, an automatic exchange of financial information was set up since 2013. Failure to comply will result in exorbitant fines.
U.S. Citizens living abroad
U.S. Citizens living in the US, who failed to report their foreign bank accounts, could expect high fines, up to hundreds of thousands of dollars; also, they were being charged with a criminal offense.
U.S. Citizens living abroad are now also being actively investigated (often for the first time). Fortunately, the U.S. government and the IRS do make allowances for this group, if they were unaware of this law. And they have the one-time option to file their taxes via a special amnesty program. This prevents fines and is called Streamlined Foreign Offshore Procedure.
More and more expats report every day the difficulties that they have when trying to keep their investments and even their bank accounts in the U.S., because the U.S. banks and financial institutions do not want to have expats among their clientele, due to the restrictions imposed by FATCA agreements with other countries. Also, similar restrictions apply to U.S. expats that would like to open an investment account in Europe, where sometimes banks do not let them open, or, even in some cases, to operate with specific investment tools like Mutual Funds in Europe (called PFICs) are clearly penalized by the IRS in the Annual Tax Return.
IRS Tax Amnesty
In order to avoid anger, fear and panic, the only current option is to participate in the one-time Streamlined Procedure. This IRS procedure prevents you from being fined for any Tax Return non filed before or incorrectly filed in the past. This procedure has been around for a while and could continue for years to come, until the IRS decides to terminate it.
The Streamlined Procedure is the only way to catch up with the IRS. Please keep in mind that in 2020 and 2021 you will have the refunds of the Stimulus Checks distributed by both Administrations (Trump and Biden) which would be a minimum of $3,200, if you are a US Citizen. For the expatriation procedure you will need to prove that you have filed the Tax Returns of the last five years.
Do not hesitate to read more about the Streamlined Procedure in our website and check the list of documents that we need to prepare your procedure. You can also check our Q&A or call us directly.