Mandated Reporting to US Tax Authorities
Updated: Nov 5, 2020
All American citizens, including those residing abroad, are required to file annual reports with US tax authorities. How is this done, can reporting be completed retroactively, and what exactly is the Streamlined Filing Procedure?
Having American citizenship or a Green Card are considered highly coveted statuses, but alongside the advantages and rights, these statuses bring are several obligations. One of them is mandated reporting to Us tax authorities. The US taxation system is run on a personal basis. as such, whoever is in possession of American citizenship, a US passport, or Green Card, is required to report their income and assets to US tax authorities, even if they live abroad, or have never stepped foot on American soil. Singer Omer Adam’s decision to relinquish his American citizenship due to tax considerations raised many an eyebrow, but also made the subject of mandated reporting to US tax authorities a hot topic. Israelis living in Israel who also possess US citizenship are not always familiar with the annual reporting requirements, and can, therefore, commit US tax crimes, without even knowing it. it is important to know that not reporting is against the law and can lead to harsh financial sanctions and fines.
Who is required to report and what must be filed?
US citizens and Green Card holders are required to report their income to US tax authorities by filing annual tax returns, even if their income was earned outside of the US. This is true, even if they do not currently, or have never lived in the United States. With each financial year comes two reporting requirements: the Individual Tax Return, a report to the IRS on the person’s individual income, and the Foreign Bank Account Report (FBAR), a report to the US Treasury on existing foreign bank accounts, regardless of whether or not these accounts generate income for those who meet the FBAR filing threshold.
Failure to meet these requirements can result in the issuing of significant monetary penalties and, in certain cases, criminal litigation. mandated reporting to US tax authorities is annual, and US tax return deadlines change according to the type of report being filed. That being said, even though US citizens living abroad must file the report, they are often exempt from paying taxes when their income is generated beyond American borders.
Considering skipping out on reporting? Think again
Mandated reporting to US tax authorities is not a new concept, but over the past decade, enforcement has ramped up. To prevent tax evasion using financial accounts managed outside of the US, the Foreign Account Tax Compliance Act (FATCA) was legislated. This law requires any financial institution outside of the US, such as banks, insurance companies, and pension funds, to determine whether account holders are US citizens or residents, for tax purposes. The Israeli government signed a cooperation agreement and implemented this law together with the American government in 2016. as such, know that if you are American citizens and are not reporting your accounts - the institutions managing your accounts will ensure that US tax officials receive a report of your account’s existence. Within the framework of this cooperation, failure to report can result in the financial institution placing sanctions on uncooperative account holders, including the freezing of their accounts, and the doling out of fines.
This law applies to bank and brokerage accounts (stock and financial instrument investments) alike - in Israel and in other countries outside of the US, as well as provident funds, managers’ insurance, pension funds, advanced study funds, life insurance with savings elements, and more. Namely, the requirement is on reporting alone - a sort of asset declaration - and does not necessarily lead to these accounts being taxed, so long as income has not been generated.
The Streamlined Filing Procedure
American tax authorities know that many US citizens, especially those living abroad, are not always aware that they must file a tax return and FBAR. as such, the US government allows those who have yet to establish their tax status to do so via a voluntary admission process that prevents and even cancels penalties resulting from delayed filing or tax payments.
This process is called the Streamlined Filing Procedure, and it is applicable when the non-compliance is non-willful, not out of a desire to avoid paying taxes (and only on the condition that the citizen is not currently being audited or investigated by US tax authorities). In 2014, several significant changes were made to the Streamlined Filing Procedure in order to enable thousands of Americans, mainly those living outside of the United States, to comply with the mandated reporting requirements and risk lesser penalties. the main principles of the Streamlined Filing Procedure include:
Filing tax returns for the past 3 years, and FBAR reports for the past 6 years.
Filing a declaration that proves that their failure to file income tax returns and reports on financial accounts and assets outside of the US was non-willful.
Evidence that their center of life is outside of US borders.
All returns and FBARs filed must include the individual’s valid Taxpayer Identification Number (TIN). For US citizens and permanent residents, their Social Security Number (SSN) is the required TIN. That being said, there are many Americans who do not possess a SSN and must file a request to obtain one of their own. It is important to note that not having a SSN is not a justification for failing to comply with mandatory reporting requirements.
It is also important to note that the Streamlined Filing Procedure does not have an expiration date. as such, there is no way of knowing how long it will be available to US taxpayers. To date, its leniencies remain in effect, but the IRS can put a halt to them at any time, without warning. It is recommended that you consult with an accountant who specializes in US taxation at once and take advantage of the opportunity to file your tax returns within the framework of this program and avoid being fined for missing deadlines.