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US expats have been required to file US taxes since the nineteenth century, however it’s only since the Foreign Account Tax Compliance Act (better known as FATCA) was passed in 2010 that the IRS has had the means to enforce this requirement.
 
FATCA requires US expats with over $200,000 in financial assets held overseas to report them, but it also requires all foreign banks (including all foreign financial firms, such as investment firms) to report their US account holders to the IRS directly, including contact and balance details.
FATCA gave foreign banks a few years to comply, and 2016 was the first tax year that the IRS received this information for the whole year, giving it the ability to know which expats should or shouldn’t be filing.
 
As foreign banks that don’t comply pay a large tax when they trade in US money markets, almost all (around 300,000) foreign financial firms are now complying.
 
FATCA was intended as a way to stop people dodging taxes by depositing money overseas, but it has had numerous unintended consequences that have affected millions of normal Americans living abroad. For example, many foreign banks have refused services to Americans to avoid the administrative burden of having to report them to the IRS. Almost all foreign banks have also asked their US expat clients to confirm that they are compliant with US tax filing requirements.

Furthermore, FATCA has completely changed the global regulatory environment, as around 100 other countries, perhaps envious of America’s ability to see its expats’ finances, have since signed agreements to exchange tax and banking information between them. This means that banks report everyone’s details to their national government, which then shares these details with other nations.
So unless you are happy to reside in a very underdeveloped country or a rogue state, due to FATCA, the age of financial privacy is now pretty much over, globally.

But FATCA is still creating new repercussions today, nearly a decade since being made law.
“The investing landscape for Americans abroad is becoming increasingly complex. New brokerage account and mutual fund restrictions raise high hurdles for Americans abroad to invest wisely and tax efficiently.”
      - Thun Financial
While many Americans may have struggled to obtain banking and investment services overseas over the last few years, they could at least retain their accounts in the US.

Over the last few months though, many major US banks and brokerage firms have been writing to their expat clients asking them to take their business elsewhere, as these companies don’t want the administrative compliance burden that now comes with having expat clients.
 
In particular, expats are finding their investment options limited, as they can no longer own mutual funds, meaning that managing expats’ wealth is also more complicated.
 
Whether this trend expands to smaller US investment firms and banks remains to be seen.
 
What expats should do
 
We strongly recommend that first and foremost expats ensure that they are compliant with their US tax filing obligations.
All American citizens and green card holders are required to file a US tax return reporting their worldwide income, wherever in the world they live.

There is normally no tax to pay though, as expats can claim one or more exemptions (such as the Foreign Tax Credit or the Foreign Earned Income Exclusion) that take most out of US tax liability (typically unless they are high earners paying little or no tax abroad). So it is just a filing requirement.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
Expats are also required to report their foreign bank and investment accounts by filing an FBAR if their total, combined value exceeds $10,000 at any time during the year.
 
Expats who are behind with their US tax or FBAR filing can catch up under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them.
 
So long as expats are compliant with their US filing requirements, there is little risk of their receiving fines.
 
In terms of banking and investment services, there are still options available at smaller firms for now. There are in fact specialist firms who provide financial services for expats, such as Tanager in the UK, Thun and IAM.
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Many expats are surprised and sometimes alarmed to learn that they are still required to file US taxes from abroad, reporting their worldwide income.
 
To prevent double taxation, the IRS has put in place several exemptions that expats can claim when they file, such as the Foreign Tax Credit for expats paying taxes abroad, and the Foreign Earned Income Exclusion.
Filing US taxes from abroad has been an obligation for Americans since the Civil War, however it’s only since the 2010 Foreign Account Tax Compliance Act required foreign banks to report their American account holders (including balance details) that the IRS has been able to enforce it.
 
Furthermore, Americans who meet certain requirements also have to report their foreign financial accounts each year by filing a Foreign Bank Account Report, or FBAR.
 
FBAR filing requirements
 
Americans who have a total of over $10,000 in qualifying financial accounts held at foreign institutions at any time during the year are required to file an FBAR, which in practice is FinCEN form 114.
 
Qualifying accounts include any accounts with a cash balance such as bank and investment accounts) that an expat has control or signatory authority over, including joint accounts, and business accounts, even if the account isn’t in the expat’s name.
FBAR - willfulness
 
Penalties for not filing FBARs are steep, starting at $10,000 a year if the IRS believes that the taxpayer wasn’t willfully avoiding filing, and at either $100,000 a year or half of the account balances if the IRS believes that the non-compliance was in fact willful.
“The FBAR requirement is a product of the Bank Secrecy Act of 1970, but the section that requires filing of FinCEN Form 114 (formerly known as Treasury Form 90-22.1) has only been seriously enforced in the past decade.”     - Accounting Today
This means a lot can rest on whether expats have willfully or unintentionally not filed an FBAR. Half of the account balances per year multiplied by several years can in fact result in a penalty worth more than the expat’s total assets.
 
FBAR news 2018 - penalties precedent
 
U.S. vs Colliot was decided in a district court on May 16th, 2018, and found that a penalty of 50% of each unreported foreign account balance could still not exceed $100,000, despite the IRS publicizing that whichever was higher of the two would be the penalty due. The reason given was that the law stipulating that 50% of account balances (per year) could be due as a penalty without limit wasn’t properly written to overrule the previous maximum penalty of $100,000.
 
While of course the ruling could be overruled on appeal, if not the IRS will have to either get the law changed, or accept that the maximum possible FBAR penalty is in fact $100,000 per account.
The ruling particularly impacts wealthier expats (or other Americans) who were thinking of catching up using the Offshore Voluntary Disclosure Program, which would require them to pay 27.5% of their offshore balances, as they could be better off waiting for the IRS to fine them and paying just $100,000 (per account).

Summary
What Is FBAR? The Foreign Bank Account Report (FinCEN form 114) | Bright!Tax - YouTube
Most expats won’t face the higher FBAR ‘willfulness’ fines, however, the ‘non-willful’ fines are still steep at $10,000 per unreported account per year.
 
Thankfully the IRS has provided an amnesty program for expats who haven’t been filing FBARs because they weren’t aware that they had to.
 
The program is called the Streamlined Procedure, and it requires expats to file their last three federal tax returns and last six FBARs (as appropriate) and self-certify that their previous failure to file was non-willful.
 
Expats who catch up using the Streamlined Procedure before the IRS contacts them won’t face any penalties.
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The Trump Tax Reform brought significant changes for many expats with a foreign registered businesses.
 
Previously, a foreign registered corporation owned by Americans could leave its profits in the business to avoid paying US taxes on them. This led to giant corporations such as Apple having billions of untaxed profits sitting offshore though.
To remedy the situation, the Trump Tax Reform imposed a one-time 15.5% repatriation tax on these offshore profits (which were known as ‘retained earnings’).
 
The repatriation tax was also applied to all Americans who own at least 10% of an offshore corporation that is at least 50% owned by Americans however, so including all US expats with a small businesses. According to Democrats Abroad, an estimated one million US expats are believed to be affected.
 
Furthermore, future profits of qualifying foreign corporations (typically those owned at least 50% by Americans) will be taxed as if they were their American owners’ income.
The imposition of the ‘Apple Tax’ on a million expats’ small businesses has caused pandemonium around the world as expats struggle to get to grips with the new law and make changes to their businesses and corporate structures so as to remain as tax efficient as possible going forward.
“Expatriate Americans have been granted a one-year reprieve from an unexpected levy on their overseas business interests, raising their hopes of Congress amending the tax reforms signed into law by Donald Trump six months ago.”    - FT.com
Many expat groups, including ACA (American Citizens Abroad) and both Republicans Overseas and Democrats Abroad, have also been lobbying for a change in the law to exclude smaller businesses.
 
The repatriation tax can be paid in installments over 8 years, and earlier this year the IRS announced an extension for the first installment to June 15th.
 
Now however the IRS has announced a further extension until April 15th next year to pay the first installment, for corporations that owe less than $1m total repatriation tax.

This change firstly provides relief (if temporarily) to millions of expat small business owners who otherwise may have faced penalties if they didn’t pay the first installment by June15th 2018 (and also may have had their future installments accelerated), but it also raises hope that the law may be changed to exclude these smaller businesses entirely later this year.
For now though, the pressure is off for a million expats to pay a first installment this month, although those affected should note that interest will be due on payments made after June 15th this year.
 
All American citizens and green card holders are required to file US taxes, declaring the worldwide income, wherever in the world they happen to live.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
The IRS has provided exemptions such as the Foreign Earned Income Exclusion and the Foreign Tax Credit that expats can claim when they file to prevent them from paying taxes twice. There is also an amnesty program called the Streamlined Procedure that allows expats who weren’t aware of the requirement to file to catch up without facing penalties - so long as they do so before the IRS writes to them.
 
Expats may also have to report their foreign bank and investment accounts by filing an FBAR.
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Unlike other nationalities, American expats find themselves in an unfortunate situation of having to file a US tax return from abroad declaring their worldwide income every year, often as well as filing a tax return in their host country.
 
To avoid double taxation, the IRS has made available a number of exemptions, such as the Foreign Earned Income Exclusion and the Foreign Tax Credit, that expats can claim when they file.
Which is most beneficial to claim will depend on each expat’s particular circumstances, such as which country they live in, and their income sources and level.
 
Furthermore, US expats often have to report their foreign financial accounts (including both their bank and investment accounts) by filing a Foreign Bank Account Report, better known as an FBAR.
 
When expat file form 1040, expats must elect whether to file as a single taxpayer, a married taxpayer, or as Head of Household. For some expats, filing as head of household may save them money.
 
Filing as Head of Household
The advantages of filing as Head of Household are that you have higher income tax bracket thresholds, and also a bigger Standard Deduction. So for example, for a single taxpayer, the 2018 brackets are:
“If you are a U.S. citizen married to a nonresident alien you may qualify to use the head of household tax rates.”      - the IRS
  • 10%: $0 to $9,525 of taxable income
  • 12%: $9,526 to $38,700
  • 22%: $38,701 to $82,500
  • 24%: $82,501 to $157,500
  • 32%: $157,501 to $200,000
  • 35%: $200,001 to $500,000
  • 37%: over $500,000
  • Standard deduction: $12,000

While for a Head of Household they are:
  • 10%: $0 to $13,600 of taxable income
  • 12%: $13,601 to $51,800
  • 22%: $51,801 to $82,500
  • 24%: $82,501 to $157,500
  • 32%: $157,501 to $200,000
  • 35%: $200,001 to $500,000
  • 37%: over $500,000
  • Standard deduction: $18,000
 
To file as Head of Household, expats must meet certain criteria however, such as not being married, and having qualifying dependents for whom you pay at at least half the cost of keeping up their home. (Qualifying dependents may be children, or may be other relations).
 
When does electing to file as Head of Household make sense for expats?
 
Electing to file as Head of Household becomes interesting for expats because, although you have to be unmarried to do so, the IRS defines being married in this context as being married to another US tax payer.
So the millions of expats who are married to a foreigner are, as far as the IRS is concerned for the purposes of filing as Head of Household at least, considered to be unmarried.

Of those expats married to a foreigner (or ‘non-resident alien’ as the IRS refers to foreigners who live abroad), those who pay foreign income tax at a higher rate than the US rate will benefit from filing as Head of Household, as will those
US Expats Tax Requirements Overview | Bright!Tax - YouTube
...who pay foreign tax at a lower rate (or not at all) and who earn over around $100,000.

- expats who pay foreign income tax at a higher rate than the US rate can claim the Foreign Tax Credit, giving them a $1 US tax credit for every dollar of foreign tax that they’ve already paid; however, because they can claim more tax credits than the US taxes that they owe, they can carry forward their unused credits for future use. Filing as Head of Household will then give them a lower theoretical US tax liability, and so more spare US tax credits to carry forward.
 
- expats who pay foreign taxes at a lower rate (or no foreign taxes) and who earn over around $100,000 can claim the Foreign Earned Income Exclusion to exclude the first around $100,000 of their earned income from US tax liability, but will be liable to US income tax on their earnings above this amount. Filing as head of household will therefore reduce their final US tax liability.
 
Catching up
 
Expats who are behind with their US tax filing because they weren’t aware that they have to file can catch up without facing any penalties or back taxes bills using an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS writes to them.
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US expats are required to file US taxes from abroad, reporting their worldwide income, just like Americans living in the US.
 
Many expats believe that either a tax treaty or their income level may mean that they don’t have to file. Unfortunately though, all American citizens and green card holders who earn over $10,000 (or just $400 of self-employment income) are required to file an annual federal tax return.
To avoid double taxation, expats can claim one or more exemptions that the IRS has made available, such as the Foreign Earned Income Exclusion and the Foreign Tax Credit, depending on their circumstances.
 
How expats with a foreign business report it, depends on the type of business and the expat’s circumstances. US tax classification of a foreign business can differ from foreign classification, and how a business is classified is important as it affects the way that the business is reported.
 
US tax classification for expats’ foreign business
 
Whereas single-owner, US-registered limited liability companies are assumed to be ‘disregarded entities’ (meaning that their profits are reported on their owner’s individual tax return), expats with a foreign limited liability company must file form 8832 to elect to have their business classified as a disregarded entity by the IRS.
Once they have done this, expats who own 100% of a foreign limited liability company also have to file form 8858 every year to report the details of the foreign corporation (although it’s profits will still be reported on the owner’s form 1040).
“The classification of a foreign entity as a corporation, a partnership, or disregarded entity, potentially affects many aspects of U.S. taxation.”
     - the IRS
Expats who don’t file form 8832 to elect to have their foreign limited liability company classified as a disregarded entity have to file the much more onerous form 5471 each year to report their business details and profits.
 
Expats who own more than 10% of a foreign corporation meanwhile, or who are officers of a foreign corporation and acquire stock in it during the year, or who earn any part of a foreign corporation that is a Controlled Foreign Corporation (which generally means that the corporation is in total more than 50% owned by Americans), are also required to file form 5471.
 
Expats who own over 50% of a foreign partnership are required to file form 8865, along with any expats who own at least 10% of a foreign partnership that no one owns over 50% of.

FBAR for expats with a foreign business
Americans who have a total of over $10,000 in foreign bank and investment accounts at any time during a year are required to report them by filing FinCEN form 114, better known as a Foreign Bank Account Report, or FBAR.

Expats should note that the combined total of foreign account balances also includes any accounts that expats have signatory authority or control over, including business accounts, even if the account isn’t in the expats’ name.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
How the Tax Reform affects expats with a foreign business
 
Trump’s Tax Reform affects expats with foreign registered corporations that have retained earnings (retained earnings are profits that were left in the business rather than extracted, which up until now weren’t considered taxable). Historical retained earnings are now subject to a one off Repatriation Tax of 15.5%, which can be paid over a number of years.
 
Furthermore, from now on profits from Controlled Foreign Corporations will be taxed as if they were the owners’ income. This could lead to higher rates of tax payable on company profits, so expats with Controlled Foreign Corporations should consult an expat tax specialist as soon as possible to minimize their future corporate tax liability.
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If you’re an American citizen or green card holder, you’re required to file US taxes wherever in the world you live, reporting your worldwide income.
 
The US is almost the only country in the world that requires all of its citizens to file even if they live abroad. This means that US expats often have to file taxes twice, once to the IRS, and also in the country where they live (depending on the tax rules there).
The tax treaties that the US has with nearly 100 other countries don’t prevent US expats from having to file form 1040 from abroad, however to help prevent expats paying tax on the same income twice the IRS has put in place a number of exemptions that expats can claim when they file their US return, such as the Foreign Tax Credit and the Foreign Earned Income Exclusion. Which exemptions it’s most beneficial to claim depends on each expat’s particular circumstances however, including their income levels, foreign residency status, and whether they are paying foreign taxes and if so at what rates.
 
This means that expats typically have to file extra forms along with form 1040 compared with Americans living stateside.

Differences for expats filing form 1040
Expats are required to file form 1040 just the same as Americans living stateside, reporting their worldwide income, including all their worldwide income sources and their deductions if necessary just as if they were living in the US. There are some differences however for expats filling form 1040 from abroad.
“If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad.” - the IRS
One of the major differences for expats filing form 1040 from abroad is that they may have to report foreign earned income that was earned in a foreign currency, meaning that they have to convert foreign currencies into dollars when filing their US tax return.
 
The IRS doesn’t have an official currency exchange rate, and so accepts any officially posted rate, so long as the same rate is used consistently.
 
This gives expats some room for manoeuvre when filing, in terms of using a rate that is advantageous to them, so long as they are consistent in the rate that they use.
Expats claiming exemptions such as the Foreign Earned Income Exclusion also have to include them on form 1040, in field 21.

Expats with a foreign spouse should also seek advice before checking 'married filing jointly', as this can be either advantageous or disadvantageous depending on each  expat’s particular circumstances.
 
Foreign account reporting
US Expats Tax Requirements Overview | Bright!Tax - YouTube
As well as filing form 1040, expats are also required to report their foreign bank and investment accounts if the total, combined value of all their foreign account balances exceeds $10,000 at any time during the tax year by filing FinCEN form 114, better known as a Foreign Bank Account Report, or FBAR.
 
Catching up
 
Many expats are behind with their US tax filing as they weren’t aware that they had to file form 1040 from abroad.
 
Expats who are three or more years behind can catch up without facing any penalties though using an IRS amnesty program called the Streamlined Procedure.
 
The Streamlined Procedure requires that expats file their last three federal tax returns (including back claiming the most beneficial exemptions), their last 6 FBARs (if necessary), and self-certify that their previous non-compliance was non-willful (i.e. unintentional).
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US citizens are required to report their worldwide income to the IRS by filing a federal tax return each year, regardless of whether they live in the US or abroad, whether they are paying foreign taxes or not, or whether they live in a country which has a tax treaty with the US or not.
 
There are nine million US citizens living abroad, however less than two million of them filed US tax returns last year.
The truth is that many of those US citizens abroad who aren’t filing have never filed US taxes from abroad because they aren’t aware that they are required to. The US is the only developed nation that requires expats to file after all, so it is an anomaly, rather than obvious. Ignorance of the requirement isn’t an excuse that will let expats who aren’t filing avoid fines though if or when the IRS asks however.
 
Since FATCA (the 2010 Foreign Account Tax Compliance Act), almost all foreign banks and other financial firms are providing the IRS with information about their US account holders directly, while most foreign governments have signed information sharing agreements with the US, so the IRS now has access to information that lets it know which expats should in fact be filing US taxes.
 
So we strongly recommend that, to avoid fines, US citizens living abroad who have never filed US taxes should take steps to become compliant as soon as possible.
How can US citizens living abroad who have never filed US taxes become compliant?
 
US citizens living abroad who have just missed one or two years US federal tax filing can catch up by simply back filing their missing returns.
“For eligible U.S. taxpayers residing outside the United States, all penalties will be waived under the Streamlined Procedure.” - Forbes
Expats should also be aware that they are also required to report their foreign bank and investment accounts and assets if their total value meets certain thresholds.

So expats with a minimum of $10,000 in foreign bank and investment accounts at any time during the year, including any accounts they may have signatory authority or control over, are required to file FinCEN form 114 to report them, otherwise known as a Foreign Bank Account Report, or FBAR.
 
Expats with a total of over $200,000 of financial assets at any time during a tax year are also required to report them by filing form 8938 along with their federal US tax return.
US citizens living abroad who are three or more years behind with their US tax filing can catch up under an IRS amnesty program called the Streamlined Procedure.
 
The Streamlined Procedure requires expats to file their last 3 US tax returns, their last 6 FBARs (as required), and self-certify that their previous failure to file wasn’t willful avoidance.
What Is The IRS Streamlined Procedure? | Bright!Tax - YouTube
Expats who catch up before the IRS contacts them can claim one or more exemptions that the IRS has made available to help them avoid double taxation, such as the Foreign Tax Credit and the Foreign Earned Income Exclusion. Expats who wait until the IRS contacts them on the other hand aren’t normally able to, resulting in a US back taxes bill, even if they’ve already paid foreign taxes on their income.
 
Dual citizens and Accidental Americans
 
Many dual citizens, in particular those Accidental Americans who have the right to American citizenship by virtue of having an American parent or grandparent (even if they’ve never lived in the US or had a US passport), or because they were born in the US when their parents were there temporarily, are also required to file US taxes. Their situation may be more or less complex depending on the details, but we would recommend that US citizens living abroad who have never filed US taxes consult an US expat specialist tax services firm as soon as possible.
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Japan is one of the most popular Asian destinations for US expats, with tens of thousands of Americans living there.
 
Tokyo is a thrilling place to live. Its exotic, unique, modern meets traditional culture, its frenetic pace, the cuisine, and the incredible orderliness for such a big, crowded city all guarantee American expats in Tokyo enjoy an unforgettable experience.
The only downside is that US expats in Tokyo are required to file both US taxes as a US citizen, and Japanese taxes as a Japanese resident.
 
Filing both tax returns needn’t be as complicated as many American expats living in Tokyo at first think however. Most in fact end up not owing the IRS anything, although they still have to file.
 
Japanese taxes in brief
 
For expats whose only income is from employment in Japan, Japanese income tax is deducted at source and there’s no need to file a Japanese tax return. That said, for many people it’s still worth filing a Japanese tax return, as by claiming one or more of the available allowances expats can often claim a refund.
 
The Japanese tax year is the same as the US, Jan 1st to December 31st. Japanese tax returns are due by March 15th.
 
Japanese tax returns are filed to the Japanese equivalent of the IRS, which is called the National Tax Agency.
 
Japanese income tax rates range from 5% to 45%. There is also an inhabitant tax payable in the city of Tokyo which is normally 10% of income.
US taxes for expats living in Tokyo

Expats have an automatic extension until June 15th to file their US tax return, with a further extension available upon request until October 15th. Any tax owed is still due by April 15th though.
“For those who work for a company or are self-employed in Japan, the main tax breaks are the Foreign Earned Income Exclusion (FEIE) and foreign tax credits.”  
       - The Japan Times
While it’s always necessary to file, there are several exclusions that expats can claim that will reduce most expats’ US taxes payable to zero.
 
For many expats living and working in Tokyo who pay more in Japanese income tax than the US tax they owe, it’s often most beneficial to claim the Foreign Tax Credit.

The Foreign Tax Credit gives US expats a $1 tax credit for every US dollar equivalent of tax that they’ve paid abroad. For expats in Tokyo paying more Japanese tax than they owe to the IRS, this means that they can claim more US tax credits than the US tax that they owe, eradicating their US tax liability while giving them excess US tax credits that they can use in the future. Expats can claim the Foreign Tax Credit by filing form 1116.

For US expats earning less than around $100,000 and paying less Japanese tax than the US tax due, the Foreign Earned Income Exclusion is often a better option.

The Foreign Earned Income Exclusion lets expats who can prove that they are either permanently resident in Japan, or that they spent at least 330 days outside the US in the tax year, exclude the first around $100,000 of their income from US taxes.
 
The Foreign Earned Income Exclusion can be claimed by filing form 2555.
Further US filing requirements for expats in Tokyo
 
As well as filing a federal tax return, US expats in Tokyo who have more than $10,000 in total in foreign bank or investment accounts at any time during the tax year are required to file an FBAR (Foreign Bank Account Report). In practice, filing an FBAR means filing FinCEN form 114 online before October 15th.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
Because FBARs are filed to FinCEN rather than to the IRS, the penalties for not filing are much higher, so it’s important not to neglect FBAR filing, especially as almost all foreign banks and investment firms now provide the IRS with information about their US account holders directly, including balances.

Expats living in Tokyo with financial foreign assets (but not tangible physical assets such as property, or cars for example) worth over $200,000 at any time during the tax year are also required to report them by filing FATCA (The Foreign Asset Tax Compliance Act) form 8938 with their federal return.

Expats living in Tokyo who need to catch up with their US tax filing
 
Expats who have been living in Tokyo for a while but who didn’t know that they have to file US taxes can catch up with their US tax filing using an IRS amnesty program that allows them to avoid facing any penalties.
 
The program is called the Streamlined Procedure, and to qualify expats must file their last 3 tax returns, their last 6 FBARS (if required), pay any back taxes that they may owe (often none, once they’ve claimed the most beneficial exclusions given their circumstances), and self-certify that their previous failure to file was non-willful, so not willful avoidance.
 
The Streamlined Procedure is a great opportunity for expats living in Tokyo who are behind with their US tax filing to become fully compliant before the IRS writes to them, at which point they will be liable to pay back taxes and fines.
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America has an unusual tax system, as it’s based on citizenship rather than residence. This means that all US citizens (and green card holders) are required to file US taxes, whether they live in the US or abroad.
 
Nine million Americans are currently living abroad, however many of them aren’t aware of the requirement for them to file US taxes.
Until relatively recently, the IRS had no way of enforcing the requirement for expats to file. That all changed in 2010 though, when the Foreign Account Tax Compliance Act, better known as FATCA, was signed into law.
 
FATCA history
 
FATCA began as a legitimate crackdown on offshore tax evasion as the Treasury looked to increase revenue following the 2008 financial crisis.
 
The Act leverages the fact that all foreign banks and investment firms trade in US markets, compelling them to hand over details about their American account holders or otherwise face a steep tax when they trade.
 
FATCA also requires Americans who live abroad and who have over $200,000 in foreign financial assets at any time during a tax year to report their financial assets on form 8928 when they file their US federal tax return.
The information that foreign banks must provide to the IRS includes the American account holders’ name, address, and maximum account balance.

The IRS gave foreign banks a few years to comply, so 2016 was the first year that full information was provided. Around 300,000 foreign banks and other financial institutions are now complying, or, to put it another way, very few now aren’t.
“FATCA requires foreign banks and governments to hand over secret bank data about American depositors. Non-compliant institutions are frozen out of U.S. markets, so there is little choice but to comply.”     - Forbes
The unintended consequence of FATCA though was that, rather than just cracking down on willful tax evaders, millions of ordinary expats, many of whom weren’t even aware that they had to file a US tax return from abroad, are now also on the IRS’ radar.

Some expats believe that tax treaties that the US has with foreign countries protect them from having to file. Others meanwhile may have heard that if they earn under around $100,000 they don’t have to file. Unfortunately, both of these assumptions are incorrect.
 
The $100,000 figure comes from it being the Foreign Earned Income Exclusion limit, however expats still have to file to actively claim this exemption (and for many expats who pay foreign taxes, the Foreign Tax Credit may be more beneficial anyway).
 
As any Americans who have over $10,000 in foreign financial accounts (including bank and investment accounts, and those they have any control or signatory authority over) are required to report their foreign accounts by filing an FBAR (Foreign Bank Account Report) each year, the IRS can now compare information provided on FBARs with that provided by foreign banks to ensure that expats are filing honestly.

FATCA and Trump’s Tax Reform
 
Many expats pinned their hopes on Trump’s Tax Reform to repeal FATCA, however despite active campaigning from ACA, Republicans Overseas, and Democrats Abroad, this didn’t in fact happen.
There is a very reasonable argument to be made that FATCA is overreach by the US government, that citizenship based taxation is unreasonable, or that there should at least be an exemption on expats who earn under a certain amount having to file, however the difficulty for officials crafting the Tax Reform was that it had to be revenue neutral, so any loss of income from taxing expats would have had to be offset elsewhere.
What Is FATCA? The Foreign Account Tax Compliance Act | Bright!Tax - YouTube
Crawford, et al, v. Department of the Treasury, et al
 
Senator Rand Paul has been a vocal opponent of FATCA from the start, and in 2014 he along with some other plaintiffs tried to get an injunction to prevent the Treasury, the IRS, and FinCEN from enforcing FATCA. The motion was dismissed by an Ohio District court in 2016, a decision confirmed by the sixth Circuit Court in 2017. Finally, last month, the Supreme Court refused to review the decision, so it would seem that for the foreseeable future at least FATCA is here to stay.
 
Catching up with US tax and FBAR filing
 
Expats who are behind with their US tax filing can catch up without facing any penalties so long as they do so before the IRS contacts them.
 
This is possible thanks to an IRS amnesty program called the Streamlined Procedure, which requires that expats file their last 3 tax returns, their last 6 FBARs (if required), and that they self-certify that their previous failure to file wasn’t willful tax evasion.
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The IRS has released its 2017 Data Book, containing information about all US tax returns filed and taxes paid in 2017. Sifting through the data, one statistic stands out for expats in particular: international US taxpayers are much more likely to be audited compared to Americans living in the States.
 
The figures are stark: overall, around 0.5% of tax returns were audited. For US taxpayers overseas however ...
... the figure is staggeringly high - 5.2% of tax returns filed from abroad were audited last year.

US tax filing requirement for expats
 
It sometimes seems like the IRS has an illogical but deeply rooted suspicion that all Americans living abroad are avoiding US taxes, whereas the truth of course is that the vast majority of expats are simply ordinary Americans who happen to be living extraordinary lives.
 
US law requires Americans to file a US tax return reporting their worldwide income wherever they may live, whether in the US or abroad. This is because the US taxes based on citizenship, rather than on residence.
 
Expats often have further reporting requirements too, as they may have to file an FBAR to report their foreign bank and investment accounts, and they also have to claim one or more of the available exemptions such as the Foreign Tax Credit or the Foreign Earned Income Exclusion when they file to avoid having to pay US taxes.
The only real good news is that expats get longer to file, with an automatic extension extended to expats until June 15th, and a further extension available until October 15th upon request.

How does the IRS choose who to audit?
 
While many audits are chosen at random, there are some particular IRS red flags that could lead some expats to be more likely to receive an IRS audit letter.
“If you keep money in a foreign bank account, it could generate questions. Over the last seven years or so, the IRS has increased its scrutiny of taxpayer returns that include evidence of holding money overseas.”      - CNBC
These red flags typically include having self-employment income, high levels of deductions, rental real estate losses, a high ratio of charitable donations to income, reported income levels at odds with bank balances reported by a foreign bank (under FATCA legislation, nearly all foreign banks and investment firms are now reporting their US account holders’ details to the IRS), and simply high income levels (e.g. over $200,000).
 
What should US expats do if they receive an audit letter from the IRS?
 
Expats who receive an audit letter (and it will always be a letter - a communication regarding an IRS audit by email, SMS, or phone is most likely a scam) should in the first instance not panic and seek to understand what exactly the IRS wants.
In many cases, the IRS may just want to see some supporting documentation.

Audit letters have a notice number in the top right-hand corner that may indicate the issue. If it’s not clear from the letter though, it’s also worth finding out whether the audit is a correspondence audit or whether you will need to meet with IRS agents in person. If the latter, it’s usually worth employing a tax attorney to accompany you.
US Expats Tax Requirements Overview | Bright!Tax - YouTube
Whatever the scenario, always be calm, courteous, helpful, and transparent when communicating with the IRS, as acting in any other way will increase the likelihood of headaches down the line.
 
How can expats can avoid an IRS audit?
 
The best step that US expats can take to avoid an IRS audit is to employ a reputable expat specialist tax accountant to help them prepare their US tax returns.
 
As US tax filing is typically more complex for expats than for Americans living in the States, expats with all but the simplest circumstances should think carefully before preparing their own tax return. It’s also important for expats to do their due diligence and research before hiring a CPA firm to help prepare their expat tax return, to ensure that they feel confident in the credentials and specialist knowledge of the firm they choose.
 
Finally, we would recommend that expats always keep their records for at least 3 years after filing, just in case, as most audits happen around 2 years after a return has been filed.
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