If you've got an IRS letter on your desk right now, you have a decision to make, and the clock matters. I'm Darrin Mish. I've spent 32 years helping people with exactly this kind of situation. Here's what you should do.
The Conversation I Have Several Times a Month
A U.S. citizen calls from Madrid, Lisbon, Bangkok, Dubai. They moved abroad five, ten, fifteen years ago. They stopped filing U.S. taxes because they assumed – or were told – they did not owe anything. Then they got married abroad, bought a house, started a business, and now want to come home or apply for a mortgage or sell property. The U.S. compliance gap is suddenly a real problem.
The short answer: it is fixable. Almost every case I see is fixable. The longer answer is that the path through depends on whether you actually owed tax and how the IRS finds out.
Why the Filing Obligation Continues
The United States is one of two countries in the world that taxes its citizens on worldwide income regardless of where they live (the other is Eritrea). Moving abroad does not end the U.S. filing obligation. The income earned in Spain or Thailand or Saudi Arabia is reportable on a U.S. return even though it is also taxed by the country of residence.
The mechanism that prevents most expats from owing actual U.S. tax is the foreign earned income exclusion under IRC Section 911 and the foreign tax credit under IRC Section 901. The exclusion lets a qualifying expat exclude approximately $130,000 of foreign earned income from U.S. tax (the 2025 amount, indexed annually). The credit offsets U.S. tax with foreign tax paid on the same income.
For most middle-income expats living in countries with normal tax systems, these mechanisms eliminate U.S. tax liability. But they have to be claimed on a filed return. Not filing means not claiming. Not claiming means the IRS may treat the income as if it had no exclusion and no credit.
What Happens When You Do Not File
If the IRS discovers unreported foreign income, it can prepare a substitute for return on your behalf (SFR). The SFR uses information returns the IRS already has – W-2, 1099, foreign bank reporting under FATCA, exchanges of information with treaty partners. It does not apply the foreign earned income exclusion or the foreign tax credit. The result is an assessment of tax on gross income without the benefits of expat-specific provisions.
For most expats, the SFR overstates tax liability by a wide margin. Filing an actual return – even a late one – typically reduces the SFR balance dramatically. But filing has to happen, and it has to happen before the IRS starts levying assets or filing notices of federal tax lien.
The Penalty Structure
Late filing of a U.S. return carries multiple penalties.
The failure-to-file penalty is 5 percent of the unpaid tax per month, capped at 25 percent. If no tax is owed, the failure-to-file penalty is zero.
The failure-to-pay penalty is 0.5 percent of the unpaid tax per month, also capped at 25 percent. If no tax is owed, the failure-to-pay penalty is zero.
Interest accrues on unpaid tax at the federal short-term rate plus 3 percent, compounded daily.
For most expats whose foreign earned income would have been fully covered by the exclusion or credit, the failure-to-file and failure-to-pay penalties are minimal or zero. The exposure is in the information returns.
The Information Return Penalties
FBAR, Form 8938, Form 5471 (for foreign companies), Form 3520 (for foreign trusts and large gifts), Form 8621 (for PFICs) all carry penalties for late filing or non-filing.
FBAR: $16,000 per non-willful violation, $156,000 or 50 percent of account balance per willful violation (approximate, inflation-adjusted).
Form 8938: $10,000 initial penalty, plus additional $10,000 per 30-day period after IRS notice, capped at $50,000.
Form 5471: $10,000 per missed form, plus additional $10,000 per 30-day period after IRS notice, capped at $50,000.
Form 3520: greater of $10,000 or 35 percent of transfer amount.
An expat who stopped filing ten years ago and has even a modest foreign bank account, a foreign company stake, and a foreign retirement plan may face six-figure penalty exposure from the information returns alone.
The Disclosure Path: Streamlined Foreign Offshore Procedures
The Streamlined Foreign Offshore Procedures (SFOP) is the program built for non-resident U.S. taxpayers who failed to file. SFOP eligibility requires:
The taxpayer must have been physically outside the United States for at least 330 full days in one or more of the three years for which delinquent returns are being filed.
The taxpayer must not have had a U.S. abode during that period.
The failure to file must have been non-willful (negligence, inadvertence, mistake, or good-faith misunderstanding).
SFOP imposes no penalty. The taxpayer files three years of delinquent returns and six years of FBARs along with a certification of non-willful conduct under penalties of perjury. If accepted, the program closes out the prior years.
What “Non-Willful” Means in This Context
Non-willfulness is the eligibility hinge for SFOP. The IRS certification asks the taxpayer to attest that the failure was due to negligence, inadvertence, mistake, or a good-faith misunderstanding of the law.
Many expats genuinely fit this profile. They moved abroad, asked someone in the new country what to do, were told they would not owe U.S. tax, and acted on that understanding. They did not hide assets. They did not lie on a Schedule B. They simply did not file.
The certification is signed under penalties of perjury. If the IRS later determines the conduct was willful (because of Schedule B answers, prior advice received, or evidence of concealment), the program closes and full penalties apply. Picking the right program at the start is critical.
Three Steps Before You File
First, list the years. Every year you did not file. Every country you lived in. Every employer abroad. Every foreign account, business interest, retirement plan, and trust relationship.
Second, do an honest non-willfulness analysis. What did you know? What did anyone tell you? Did you sign a Schedule B in any year? Were you ever told about the U.S. filing obligation?
Third, get a tax attorney before you file anything or contact the IRS. The first move sets the path. Sending letters or back returns to the IRS without a strategy can disqualify you from disclosure programs and trigger the full penalty structure.
Come Back Cleanly
After 32 years of helping expats catch up on U.S. compliance, I will tell you that the people who come in voluntarily come out cleanly. The ones who wait for the FATCA letter, the foreign bank closure notice, or the IRS assessment have far fewer options. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100. We assess SFOP eligibility, file the back returns, and bring you back into compliance without leaving exposure behind.