Behind on US returns: how the two Streamlined routes differ

What do both Streamlined routes have in common?

Both routes require the taxpayer to file three years of US tax returns and six years of FBARs, pay any tax and interest due, and sign a certification that the failure was not wilful. The certification explains, in the taxpayer's own facts, why the returns and reports were missed, and it is made under penalties of perjury.

Neither route is available once the IRS has opened a civil examination of the taxpayer for any year, or where a criminal investigation is under way. A valid taxpayer identification number is required. Streamlined submissions are not closing agreements, so the returns filed can still be selected for examination like any others.

The returns must be complete, which means including the information returns that go with them, such as Form 8938, Form 8621 for each PFIC and Form 3520 for foreign trust transactions or large foreign gifts. A Streamlined submission is therefore often more work than the missing Forms 1040 alone. The FBARs list every reportable account, including UK pensions and ISAs where those are reportable.

• Conduct must be non-wilful, certified in writing
• Unavailable once the IRS has opened an examination
• A valid SSN or ITIN is needed to submit
• Tax and interest are paid on the returns filed

How does the Foreign route work?

The Foreign route requires a US citizen or green card holder to have been physically outside the United States for at least 330 full days in at least one of the most recent three years for which the return due date has passed, and not to have had a US abode in that year. Most Americans who have lived in the UK for several years meet it.

Returns under the Foreign route can be delinquent originals or amended versions of returns already filed. The route carries no miscellaneous offshore penalty, and the IRS does not assert failure-to-file, accuracy or information return penalties, or FBAR penalties, on a qualifying submission. That makes it the more favourable of the two routes for those who meet the residence test.

How does the Domestic route work?

The Domestic route is for taxpayers who do not meet the non-residency test, typically because they live in the United States. It requires that the taxpayer has already filed original returns for the years concerned, so the submission consists of amended returns. It charges a miscellaneous offshore penalty of 5%.

That penalty is calculated on the highest aggregate year-end balance of the foreign financial assets that should have been reported, across the years covered. It is paid in place of the FBAR and information return penalties that could otherwise apply. For someone with a large UK pension or savings balance, it can be a significant sum even though no other penalty is charged.

When is Streamlined not the answer?

Some people do not need either route. A taxpayer who reported all income and paid all tax but missed only FBARs or information returns may be able to use the delinquent FBAR or delinquent international information return procedures, which have their own conditions. Others owe so little that the question is only which procedure gives the cleanest record.

Where the facts suggest wilful conduct, Streamlined is the wrong tool, and signing a non-wilful certification that the facts do not support creates a further problem. That judgement depends on what the taxpayer knew, when they knew it and what they did afterwards, and it should be settled before anything is filed.

The Streamlined procedures also do nothing on the UK side. An American who has missed UK Self Assessment returns, or who has UK income that was never declared, has a separate position to put right with HMRC. The UK has its own disclosure routes and its own penalty rules, which turn on the behaviour behind the error, and the two sets of corrections are usually best prepared together.