Tax programs for U.S. citizens working in another country

A U.S. citizen is required to file US tax return and pay tax on his worldwide income once the filing threshold is met (starts at around $10,000). For a US citizen filing requirements are generally the same whether he lives in the United States or in other country. In addition to income tax return, informational returns are also filed to disclose certain foreign assets/entities. Penalty for not filing informational returns is very high and usually runs at $10,000 per form per year.

Currently, there are 2 programs available for U.S. taxpayers, who are delinquent on their flings related to the foreign income and foreign assets:

  1. Offshore Voluntary Disclosure Program (OVDP)
  2. Streamlined Filing Compliance Procedure

OVDP is a more comprehensive program that requires to file eight years of delinquent tax and informational returns. A taxpayer pays 20% penalty on income and 27.5% penalty on the value of foreign assets not reported. The advantage of this program is, that once accepted, the taxpayer will not be criminally prosecuted, which is a possibility in case of willful non-disclosure of foreign assets. Usually, those who hid their assets willfully participate in this program.

Streamlined filing is a program that does not have a formal acceptance and protection from further scrutiny. This program requires filing of last three years of tax returns and six years of FBARs ( foreign bank account reports). There is no penalty for the unreported foreign assets for those who lived outside of the United States. The taxpayer only pays tax and interest on the previously unreported income. Usually, this program is for those who had no knowledge that they had to file tax returns and disclose financial assets.