Filing late US tax returns: which route fits when years are missing

If you need to file a late US tax return, you rarely have just one problem. Usually it's a chain: missing returns, missing account reports, perhaps a missing taxpayer number. The IRS offers several routes, from the ordinary late form to the Streamlined procedures, and each fits a very different situation. This page sorts out the routes for Europeans: nonresidents with US income, people who have lived or still live in the US, and those who only discovered their obligation late.

"Filing late" sounds like dropping a form in the mailbox a little after the deadline. In US tax, it's a choice between several routes, and the right one depends on three questions: What's missing, who were you to the IRS in the missing years, and was the failure an honest mistake? The answers lead either to an ordinary late return, to one of the two Streamlined procedures or, where the failure was willful, to the IRS disclosure program. For an overview of the full return, see the pillar page Filing a US tax return as a European. If you're a US citizen living in Europe, you'll find the foreign procedure explained in detail on Everything about Streamlined Filing; this page looks at all the other situations and at the limits not covered there.

1Sort it out first: what's missing and who you were to the IRS

Before you fill in a single form, make three lists. The first covers the years in which you should have filed an income tax return. The second covers reports that carry no tax, such as the FBAR for accounts outside the US or information returns on foreign companies and funds. The third shows your status in each year. Status decides the form: as a resident you file Form 1040 with your worldwide income, as a nonresident Form 1040-NR with your US income, and in the year you arrive or leave a dual-status return. How to determine your status is explained on 1040 or 1040-NR; the year with two statuses on Year of arrival and year of departure.

Typical situations among our readers look like this:

• An Austrian woman has been renting out an apartment in Florida for years and has never filed a 1040-NR because the property manager withheld tax.
• A German man worked in the US on a visa for a few years, filed his returns, but never reported his brokerage account and bank accounts back home, and now lives in Munich again.
• A Swiss woman with a green card lives in Texas and didn't report her Swiss pension and bank accounts on her 1040.
• A married couple moved to the US and filed nothing in their first year because they didn't know when residency kicked in.

Each of these situations calls for a different route. If you also lack a US taxpayer number, you apply for it together with your first return; more on the page Applying for an ITIN.

2The standard route: the late return

The IRS puts it simply: file all the returns you owe, even if you can't pay in full, the same way and to the same place as a timely return. If you've received a letter, send the return to the address given in that letter. According to the IRS, a complete late return takes about six weeks to process.

2.1How far back

Legally, there's no limit: without a return, tax can be assessed at any time under § 6501(c)(3), and the statute of limitations only starts once you file. In practice, the IRS follows its own guideline (Policy Statement 5-133): anyone who owes returns is asked to file them, but enforcement normally goes back no more than six years, and further only with a manager's approval. If there are signs of willfulness or fraud, other procedures apply.

2.2What it costs

For each late year, the failure-to-file and failure-to-pay penalties plus interest are added to the unpaid tax. How they're calculated is on the page US tax return deadline. Two things stand out when filing late: the penalty is based on the unpaid tax, so a year with a refund carries no penalty. But you only get the refund if you file within three years of the due date. And as long as returns are missing, the IRS holds back refunds from other years.

2.3What happens if you wait

The IRS can prepare a return for you itself (Substitute for Return). According to the IRS, it often leaves out deductions and allowances. You then receive a notice of the proposed assessment (Notice of Deficiency CP3219N) and have 90 days to file your own return or go to Tax Court. No extension is available at that point. If you repeatedly fail to file, you risk further penalties, up to criminal prosecution. Filing your own return still pays off after a substitute return; the IRS usually adjusts your account to the correct figures.

The IRS itself helps with the paperwork: with Form 4506-T or through Get Transcript, you can get the wage and income data reported to it for the missing years.

3The 16-month limit for nonresidents

Nonresidents face a rule that residents don't, and it can get expensive when you file late. Under § 874(a), you're only entitled to deductions and credits if you file a true and accurate return, and under § 1,874-1(b) of the Regulations only if it's timely. Timely means within 16 months of the due date. If you also didn't file for the prior year, the window closes earlier: on the day the IRS notifies you that the return is missing and that you can no longer claim deductions, if that day falls before the 16 months are up.

This mainly affects income taxed on a net basis: profits from a US business and rent from US real estate for which you elected to be taxed as business income. If the return is late, the IRS taxes the gross rent without deducting interest, depreciation or expenses. Withholding tax and wage withholding are still credited to you. The IRS can waive the deadline if you show that you acted reasonably and in good faith and cooperate in determining your tax.

One simple step protects you going forward: if you're unsure whether your US activity counts as a business, you can file a protective return on time. It contains no figures, only the reason, and preserves your deductions in case the IRS later classifies the income differently. The same approach works if you rely on a tax treaty; more on the page Treaty positions and tax treaty benefits.

4Streamlined: two procedures for non-willful failures

The Streamlined Filing Compliance Procedures have existed since September 1, 2012. They're aimed at individuals who certify that their failure to report income from foreign assets and pay the tax on it was not willful. By the IRS definition, non-willful conduct is due to negligence, inadvertence, mistake or a good-faith misunderstanding of the law. Foreign, from the IRS point of view, means your checking account, brokerage account or fund back home in Europe.

4.1The foreign version is open to non-Americans too

The Streamlined Foreign Offshore Procedure is designed for US taxpayers living outside the US. For US citizens and green card holders, the IRS requires that in at least one of the last three years whose deadline has passed they had no US abode and spent at least 330 full days outside the country. For everyone else, the condition is simpler: in at least one of those three years, they must not have met the Substantial Presence Test. The IRS gives its own example: a French woman transferred to the US by her employer in May 2012 met the test in 2012 and 2013, but not in 2011, and therefore qualifies.

For Europeans, this means: if you lived in the US for a few years and moved back, or only arrived in one of the three years, you can often use the foreign version. It requires late or amended returns with all information returns for the last three years, FBARs for the last six years and a signed Form 14653. If you meet every requirement, you pay tax and interest, but no failure-to-file or failure-to-pay penalties, no accuracy penalties, no information return penalties and no FBAR penalties. If you don't have a US taxpayer number, you include your ITIN application.

4.2The domestic version has a hurdle and a price

If you don't meet the foreign requirement, meaning you were resident in all three years, you can use the Streamlined Domestic Offshore Procedure, but only if you filed a return for each of the last three years where you were required to. The IRS states explicitly that late original returns cannot be filed through this procedure. It corrects incomplete returns with Form 1040-X; it does not replace missing ones. There is also a penalty: 5% of the highest aggregate year-end value of the affected foreign assets, looking across the three tax years and the six FBAR years. Other penalties do not apply. The certification of non-willful conduct here is Form 14654.

For both procedures: the paperwork goes on paper to the IRS in Austin, with "Streamlined Foreign Offshore" or "Streamlined Domestic Offshore" written in red at the top of each return, and the FBARs are filed electronically with a reference to the procedure. The IRS does not confirm receipt and does not enter into an agreement; the returns are processed like any other and can be audited like any other.

5When Streamlined doesn't fit

• No foreign asset. If all that's missing is the 1040-NR for a US property, there is no foreign asset with unreported income. In that case, a late return is the way to go.
• Ongoing audit. If the IRS has opened an examination for any year, even on a different issue, both procedures are off the table. The same applies to an investigation by IRS Criminal Investigation.
• Earlier quiet disclosures. If you have already amended or filed late without using a procedure, you can still use Streamlined, but penalties already assessed will not be abated.
• Willfulness. If you knew you had to report and deliberately didn't, you cannot sign the certification. For you there is IRS Criminal Investigation's Voluntary Disclosure Practice, starting with a preclearance request on Form 14457. It is meant to limit criminal prosecution and requires a truthful, timely and complete disclosure. Here an attorney belongs at the table before any form goes out.

6Catching up on FBARs and information returns without a procedure

Not every lapse is about tax. If you reported and paid tax on all your income but forgot the FBAR, you file the missing reports electronically through FinCEN's BSA E-Filing System and explain the reason for the delay. The IRS advises doing this as early as possible, while it hasn't contacted you and no examination is under way. The IRS first-time abatement rule for failure-to-file and failure-to-pay penalties does not list the FBAR among the eligible penalties; more on the page Filing a late FBAR.

Missing international information returns, for example on foreign companies, trusts or funds, are filed under the IRS procedure for delinquent international information returns: attached to an amended return, with Forms 3520 and 3520-A following their own instructions. With each form you can include a statement explaining the reasonable cause. The IRS may still assess penalties first and only review the cause on request; for Forms 3520 and 3520-A it reviews it beforehand if the top of the form states that such a statement is attached.

7The paperwork and the order of steps

1. Count the days. Entry and exit dates for each year, from your passport, flight bookings and calendar. They decide your status and whether the foreign procedure applies.
2. Gather the US data. Wage statements, Forms 1042-S and 1099, and the IRS data via Form 4506-T or Get Transcript.
3. Gather the home-country data. Tax assessments and returns from your home country, bank statements showing the highest balance for each year, and brokerage statements.
4. Choose the route. Late return, Streamlined Foreign, Streamlined Domestic or disclosure, based on the questions above.
5. Sort out your tax ID. Without a Social Security number or ITIN nothing gets processed; the ITIN application can accompany the first return.
6. File and pay. Tax and interest with the filing, and in the domestic procedure the penalty too. After that, the normal calendar applies for all following years.

How we help you

• Streamlined FilingCatch up on missed US tax returns and FBARs through the Streamlined procedure.
• Your US Tax ReturnForm 1040 or 1040-NR, handled in English.
• IRS letters and penaltiesMail from the IRS? We reply, request penalty relief and put things right.
• ITIN ExpressYour ITIN through our special procedure, no tax return needed.
• US Tax ConsultationYour US tax question, answered by people who know both sides.