Is a US citizen required to file US taxes if they have never lived in the US and what are the consequences?
As a basic rule, U.S. citizens, even those who have never lived in the U.S., are subject to U.S. tax and reporting on their worldwide income. You must annually report all of your income to the IRS, whether the income is from U.S. sources or foreign sources and whether or not the income is taxed or reported in the new country of residence. This system of citizenship-based taxation (rather than residence-based taxation) is unique to the United States (the only other country that taxes its citizens in this manner is Eritrea).The consequences for delinquent taxpayers can be steep, and with the strengthening of FATCA, the likelihood of the IRS catching up with you is greater than ever. For more on FATCA and the consequences of delinquency, please visit our website: www.expattaxprofessionals.com.That being said, the good news is both U.S. domestic tax law and U.S. tax treaties contain a number of provisions that are designed to prevent “double taxation,” or taxation on the same income in both countries (e.g., the U.S. and the new country of residence). Domestic law provisions include the foreign earned income exclusion (for 2022. you can exclude up to $101,300 of your foreign earned income), the foreign housing exclusion, and the foreign tax credit. These provisions, in many cases, can reduce or even eliminate the U.S. federal income tax that would otherwise be due by you. Keep in mind, however, that even if no U.S. tax is owed, a U.S. tax return still generally must be filed in order to benefit from these provisions, and the failure to do so can result in severe penalties.How to proceed now? Assuming that your failure to file all of these years was non-willful (for example, you received bad advice in the past or otherwise had a good reason to think you had no filing obligation), your best bet is to enter into the IRS’s amnesty program called the Streamlined Foreign Offshore Procedures. Under the current Streamlined program, you’d be required to file the prior 3 years of tax returns and 6 years of FBARs and fill out a certification of non-willfulness. A taxpayer who complies with these procedures does have to fork over previously unpaid taxes with interest, but is not subject to penalties • a great deal for taxpayers who would otherwise be subject to potentially enormous penalties for non-compliance. In your case, this would work particularly well if you owe no back taxes (for example, due to the fact that your annual income falls below the foreign earned income exclusion threshold).In theory, there are other potential options available to you, such as: (1) “Noisy” Disclosure (filing past delinquent returns with a statement explaining the reasons for the delinquency), (2) “Quiet” Disclosure (filing past delinquent returns without any statement of explanation), and (3) Prospective Filing (ignoring past delinquencies and complying only with respect to tax years moving forward).However, we do not recommend the above alternative approaches for a number of reasons. First, the IRS frowns upon attempts by taxpayers to circumvent the programs specifically designed to benefit delinquent taxpayers. Second, the outcomes associated with the alternative approaches can vary so greatly and can potentially lead to disastrous results. Third, we have yet to encounter a situation that justifies the risks associated with these approaches in contrast to the IRS amnesty programs, which offer the taxpayer certainty and a clean record moving forward.