Q+A – Options for US Tax Compliance

by Lance Morris
Jun 26, 2022

In this article, we’ll take a new approach to the issues we discuss, and address our 10 most frequently asked questions with regards to US tax compliance, and the question of renouncing US citizenship.

All of these questions have been asked by US citizens:

Q – Do I need to file a US tax return from New Zealand?

A – Most likely, yes. There are income thresholds to file, but these are low (around $18,000NZD of wages as an example).

The USA is one of only a handful of countries which ties tax residency to citizenship. Tax residency essentially means that you are treated no different to a US citizen who lives in the USA. Whilst this doesn’t necessarily mean you will need to pay any tax to the US, it does mean you need to file a tax return each year.

Q – Do New Zealand and the USA have a double taxation treaty?

A – Yes, they do. This is available on our website, and also to view on both the IRD and IRS websites.

Q – Will I have to pay US tax on my New Zealand earnings?

A – This is possible, but unlikely. As above, New Zealand and the USA have a thorough tax treaty in place. This means that for most types of income, we can offset US tax with NZ tax paid, and usually result in no tax to the IRS. For types of income that NZ doesn’t tax (ie capital gains) however, we are not always able to offset the US tax liability, meaning it is possible for tax to be due to the IRS.

Q – I’ve stopped filing US tax returns when I moved to New Zealand, what do I do?

A – You should begin the process to file the first tax return as soon as possible. New Zealand signed up to FATCA legislation (Foreign Account Tax Compliance Act) in 2014, which enabled a system of data-sharing between NZ banks, the IRD and the IRS. As a result, the IRS has greater powers than ever before to identify US citizens overseas who are not filing. The repercussions of not filing can be severe.

See below for potential options to catch up filing, without penalties.

Q – I’ve never filed a US tax return before, what do I do?

A – You should begin the process of filing as soon as possible, as FATCA legislation puts any US citizen at risk of being identified by the IRS, regardless of whether you have filed before. See the next question for possible solutions.

Q – Are there US tax amnesty programs available?

Yes, there are. For US citizens who were non-wilful in their failure to file tax returns, there is an amnesty program named the Streamlined Foreign Offshore Procedure. Under this program, the last three most recent years of overdue tax returns must be filed, along with 6 years of foreign bank account reporting. Under this amnesty, all penalties for failing to file originally are waived.

Once the three most recent years have been filed, all prior years are (in essence) forgiven, assuming entry into the amnesty is granted.

In order to be eligible to use this amnesty, you must have been non-wilful in failing to file tax returns originally. This means that you didn’t know you had to file, or possible other compelling reasons which prevented you from filing.

The above is referring to amnesty available for US citizens who live outside of the USA, different programs exist for those who live in the US.

Q – I filed my US tax returns, but I think they might be wrong. What are my options?

A – The Streamlined Amnesty program above is also available to those who have filed tax returns incorrectly, but unintentionally. Amended tax returns are instead filed in the place of the late tax returns, and the same benefits are offered.

Q – I’ve never filed a US tax return before, and I am thinking of renouncing my US citizenship, is this possible?

A – Yes, a form of amnesty program is available named the Relief Procedures for Certain Former Citizens. This program allows US citizens to renounce their citizenship, and then file 6 years of tax returns the following year after renunciation.

Under this program, all late filing penalties are waived, and uniquely, any tax liability calculated is also waived.

This program has strict eligibility criteria, such as having never a US tax return before, having a net worth under $2m USD, amongst other conditions. You should not renounce your citizenship on the assumption of qualifying for this program, until you’ve spoken to a US tax specialist.

Q – I have filed before, but I want to renounce my US citizenship, are there amnesty options available to me?

A – Yes, subject to meeting the criteria for the Streamlined program, you may be able to file 5 years of tax returns under the amnesty, and then renounce your citizenship. Again, advice should be sought before going down this route.

Q – I’d like to think about this for a while, is there any need to hurry?

A – Whilst there is no need to panic, you should act with some level of urgency when it comes to becoming tax compliant. The amnesty programs mentioned above have been open for some time, and may close at short notice. Without the amnesty, many taxpayers could need to file up to 7 years of tax returns, with no protection from penalties. This is in addition to the risk of being identified by the IRS first.

To add to this, entry into the amnesty programs is usually conditional based upon the US citizen acting reasonably quickly once discovering the need to file (or amend), so waiting a prolonged period can put entry into the amnesty at risk.

And there we have it, our ten most frequently asked questions with regards to US tax compliance and amnesty. We’ll continue to produce more Q+A discussions on varying subjects in the near future.

If you’d like to discuss any of the issues raised above, contact us today at https://dev-usglobaltax.sitestyle.co.nz.