Form 1040 is the standard federal income tax form that individuals use to report their income to the IRS. All U.S. persons (US Citizens, GreenCard Holder and Resident Aliens) are required to file a Form 1040 annually, regardless of their income source, the country where they reside, or whether they pay taxes in another country. The normal deadline for filing is April 15th of the following year, if you live abroad your deadline is June 15th.
So, all U.S. citizens and resident aliens living abroad or non-resident aliens with U.S. income may also need to file Form 1040 or a 1040NR. It is important to check the IRS guidelines or consult with a tax professional, like us, to ensure you are meeting the filing requirements based on your specific circumstances.
Statute of Limitations
Before you get too complacent because you don’t believe you owe tax, you need to realize there is NO Statute of Limitations (that is, there is not time beyond which the IRS can’t legally pursue you to collect tax) in cases where a tax return is not filed. This means, in theory, that no matter when the IRS discovers you did not file a tax return, it can come after you to collect if it thinks you owe tax.
What To Do If You Haven’t Filed And Don’t Owe Tax
If you haven’t reported foreign earned income for several years, the most important thing to do is to get back on track by filing those prior year returns as soon as possible. Fortunately, under a Treasury Decision issued in 1993, the exclusion is allowed for any tax year no matter when you file so long as no tax is owed. If you plan to take advantage of this rule, you must put at the top of each Form 1040 the words: “FILED PURSUANT TO SEC. 1.911-7(a)(2)(i)(D) or you can elect to file “Streamlined Foreign Offshore”
Following this simple instruction allows you to get yourself back in the good graces of the IRS, probably without owing it a cent!
What To Do If You Haven’t Filed And Do Owe Tax
If it turns out you owe tax, you can still file and take advantage of the exclusion so long as you do so before the IRS discovers you did not file in a timely fashion in the first place. Let’s say, for example, that you earned $130,000 of foreign income in 2024 and never filed a tax return to report that money. You haven’t heard anything from the IRS in years. What you need to do is file for 2024, keeping in mind the necessity of putting the magic words “Filed Pursuant to Sec. 1.911-7(a)(2)(i)(D)” at the top of the Form 1040. You will be able to use the Foreign Earned Income Exclusion or the Foreign Tax Credit to exclude your income from U.S. tax (assuming you met the foreign residency requirements). The remaining amount will be taxable, so you must calculate the amount due and send a check. You will almost certainly be assessed interest and some penalties on the amount due, but the IRS will calculate those amounts and send you a bill. Whatever the amount it is, you can be quite sure it will be considerably less than what you would have owed if you were taxed on the full $130,000.
Furthermore, the IRS is making a special effort to help people get back on track tax-wise. If you find you cannot immediately pay all the tax due, you can request to make payments under an installment agreement (Use Form 9465, Installment Agreement Request). You can also seek to have penalties dropped because of special circumstances such as a death in the family or loss of financial records that may have caused you not to file.
Filing Tax Returns: If You Haven’t Filed…
According to the IRS, about 10% of the US personas don’t file at all. Our guess is that the number is even higher. In any case, millions of folks are either illegally not filing tax returns or are filing beyond all extension dates. This number is so large that some non-filers may never get caught—but don’t bet on it. In this electronic age, it is increasingly difficult to stay below the IRS radar forever.
How Long Must You Worry About Not Filing a Tax Return?
The tax code sets out time limits, or statutes of limitations, for the IRS to pursue non-filers.
Criminal. The government can only bring criminal charges against a non-filer within six years of the date the tax return was due. For example, after April 15, 2024, you can’t be prosecuted for failing to file a 2017 tax return that was due on April 15, 2018.
Civil. There is no deadline, however, on the IRS for going after non-filers and imposing civil penalties—in addition to any taxes owed. This means that while you can’t be put in jail for not filing a 1988 tax return, you will forever owe the IRS a return—if you earned enough to have had an obligation to file. And fines—penalties and interest—on unfiled tax returns run forever.
IRS policy. Don’t worry too much about that missed tax return after six years. The IRS usually doesn’t pursue non-filers after six years from the filing due date. The IRS materials on Taxpayer Delinquency Investigations (Intemal Revenue Manual 0021; IRS Policy Statement P-5-133) read as follows:
Taxpayers failing to file returns due will be requested to prepare and file (them). All delinquent returns… will be accepted. However, if indications of willfulness or fraud exist, the special procedures for handling such returns must be followed… Factors taken into account include but are not limited to: prior history of noncompliance, existence of income from illegal sources, effect upon voluntary compliance and anticipated revenue in relation to the time and effort required to determine tax due. Consideration will also be given to any special circumstances existing in the case of a particular taxpayer, class of taxpayer or industry.
Normally, application of the above criteria will result in enforcement of delinquency procedures for not more than six years. Enforcement beyond such period will not be undertaken without prior managerial approval.
The IRS can still request a tax return for a period more than six years ago. But if you tell the IRS that you don’t have enough information to prepare a return, the agency usually will drop the request. If the IRS computer shows income information on you, such as a W-2 or 1099 form, however, the IRS may calculate and assess the tax anyway.
Consequences of Not Filing
It is a crime not to file a tax return if taxes are owed. By contrast, there is no criminal penalty if you file but can’t pay your taxes. You’ll owe interest and penalties, but you won’t be sent to jail. So even if you don’t have two dimes to rub together and owe a bundle of taxes, file your return.
If you ignore this advice and fail to file, you can be fined up to $25,000 per year and/or sentenced to one year in prison for each unfiled year. Our justice system, however, doesn’t have enough jails to put away even 1% of the non-filers, so going to jail is highly unlikely—even if you owe hundreds of thousands of dollars.
IRS Hunting for Non-filers
The IRS looks for non-filers through its computerized Information Returns Program (IRP). This tremendously effective operation matches information documents—W-2 wage statements and 1099 income reports from payers (such as your boss or the bank where you earn interest on your deposit account)—against tax returns you have filed. If the computer search fails to find a return, the IRS initiates a Taxpayer Delinquency Investigation, or TDI. A TDI is an IRS search for a taxpayer to find out why he didn’t file a tax return.
TDls usually begin with computer-generated notices. If you don’t respond to the notices, your case is eventually turned over to a taxpayer service representative for telephone contact or more letters. If the IRS is really serious, your file is assigned to a revenue officer at your local IRS office who goes out looking for you.
The IRS Taxpayer Delinquency Investigation (TDI) process can indeed include foreign countries, particularly when it involves U.S. taxpayers living abroad or with foreign assets and income.
The IRS can investigate U.S. citizens, Green Card holders, and tax residents living abroad who are required to file U.S. tax returns but have not done so. The IRS expects these individuals to report their worldwide income, regardless of where they live.
If a taxpayer has foreign assets or accounts that they have not reported (e.g., through FBAR or FATCA reporting), the IRS can include these in their investigation. Failure to report such assets can trigger a TDI.
The IRS collaborates with tax authorities in Spain since 2017 to obtain information about U.S. taxpayers’ foreign financial activities. Through treaties, agreements like FATCA (Foreign Account Tax Compliance Act), and information-sharing networks, the IRS can gather data from foreign banks and financial institutions.
Consequences of TDI for Foreign-Related Issues
If the IRS determines that a taxpayer has failed to report foreign income or assets, they can pursue various enforcement actions, including:
- Filing Substitute Returns: The IRS can file a return on behalf of the taxpayer using available information, often resulting in a higher tax liability.
- Penalties: Significant penalties may apply for failing to file, especially regarding foreign assets (e.g., FBAR penalties).
- Criminal Prosecution: In extreme cases, particularly where willful tax evasion is suspected, criminal charges may be pursued.
IRS Questioning About Unfiled Tax Returns
Someone from the IRS may ask you point-blank if you filed income tax retums for all years.
This creates a dilemma. If you haven’t filed but you answer “Yes, the IRS must have lost them,” you will have lied to the IRS, a crime punishable by up to five years in prison. But if you answer “No,” you may have confessed to the crime of failure to file a tax return. The best response is to say you’ll get back to the IRS after you check your records or speak with your tax adviser. You can’t get into trouble with these magic words.
The IRS might also ask why you haven’t filed all returns and how much income you had. Remember, if you answered the first question with “I’ll get back to you,” you won’t have to answer these questions.
Regardless of your answer, the IRS will set a deadline for the filing of all tax returns. If you need time to get your records together, ask for 60 to 90 days to do it and talk with your tax adviser, if necessary. Then you should start working on getting the returns prepared right away.
Non-filing May Be a Crime
Very few people are put in jail for not filing a tax return, but it can happen. A willful failure to file a tax return is a misdemeanor if you owe taxes. You can be sentenced for up to a year in jail and a $25,000 fine—for each year of non-filing (IRC §7201). If your failure to file is deemed to be part of a scheme to evade taxes you can be charged with a felony, a more serious tax crime, which carries a maximum punishment of five years in prison and a monetary penalty of rarely is anyone criminally prosecuted for this felony. (IRC §7201) The felony crime requires a deceitful act beyond the non-filing, such as intentionally using a false Social Security number. The misdemeanor doesn’t require any additional deceitful act.
It’s Better to File Before the IRS Contacts You
If you haven’t filed a tax return for a year or more, it’s never too late. The IRS has a policy of not criminally prosecuting those who file before they are contacted by the IRS. (IR-92-114.) Also, the IRS is often gentler in collecting from voluntary filers than from the ones they catch.
The one bit of good news is that penalties and interest are added only if you owe taxes, because they are based on a percentage of the tax due. So, for example, a business with net losses for the year can generally file as late as it wants without incurring penalties and interest. This is not to say that it is good to intentionally file late—you may lose refunds or other tax benefits granted only to timely filers. Nevertheless, over one-third of all late filers don’t owe anything—or even get refunds. Many people who dread preparing and filing returns because they thought they owed the IRS get a pleasant surprise.
Streamlined Foreign Offshore
The IRS’s Foreign Offshore Streamlined Filing Compliance Procedures (often referred to as the “Streamlined Foreign Offshore” procedure) are designed for U.S. taxpayers who have not been compliant with their tax obligations regarding foreign income, assets, or accounts but who were non-willful in their failure to comply. Here are the conditions you must meet to be eligible for this program:
- U.S. Taxpayer Status
You must be a U.S. citizen, lawful permanent resident (Green Card holder), or a U.S. tax resident (under the substantial presence test) to use the Streamlined Foreign Offshore procedure.
- Non-Willfulness
Your failure to report all income, pay all taxes, and submit all required information returns, including FBARs (Foreign Bank Account Reports), must have been due to non-willful conduct. Non-willful conduct is defined as conduct that is due to negligence, inadvertence, or mistake, or is the result of a good faith misunderstanding of the requirements.
- Foreign Residency
To qualify, you must meet one of the following foreign residency requirements:
For U.S. citizens or lawful permanent residents: You must have been physically outside the United States for at least 330 full days during any one of the three most recent tax years for which the due date (or properly extended due date) has passed.
For non-resident aliens or dual-status aliens: You must not have had a U.S. abode (i.e., your principal place of residence must be outside the United States) at any time during the relevant tax years.
- Unfiled or Amended Returns
You must submit three years of delinquent or amended federal tax returns (Forms 1040) for the most recent years for which the due date (or extended due date) has passed, including all required information returns (e.g., Forms 8938, 3520, 5471, 8621).
Additionally, you must submit six years of delinquent FBARs (FinCEN Form 114) for the most recent years for which the due date has passed.
- Payment of Taxes and Interest
You must pay all taxes due as well as any interest owed on those taxes with the submission of your returns. There are no penalties for late filing, late payment, or failure to file information returns under this procedure, provided you are eligible.
- Certification of Non-Willfulness
You must complete and sign Form 14653 (Certification by U.S. Person Residing Outside of the U.S.) certifying that your non-compliance was non-willful.
- Ineligibility for Other Programs
If you are under civil examination by the IRS or have been contacted by the IRS regarding your noncompliance, you may not be eligible for the Streamlined Foreign Offshore procedure.
Additionally, if you have already submitted a voluntary disclosure under the IRS’s Offshore Voluntary Disclosure Program (OVDP), you cannot use the streamlined procedure.
These procedures offer an opportunity to become compliant with reduced penalties compared to other IRS programs. However, eligibility and the specific steps required can be complex, so it’s recommended to consult with a tax professional experienced in offshore compliance if you believe you qualify.
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