Great Tips for Expats on US Tax Returns
While there are approximately 7.6 million Americans living abroad, only about half are actually filing their US tax returns as required by the IRS. It may not seem fair that you are required to report your worldwide income to the US, but it is the law just the same. Many expats are unaware of their filing obligations, but as the media coverage about US tax laws continues to grow, it is becoming more difficult to use the “I didn’t know” excuse with the IRS. So why should you get caught up? Here are 5 really good reasons.
1. It’s the law.
Like it or not, it’s the law. And not filing taxes while living abroad is the same as not filing while living in the US. In years past the IRS was very lenient on expats and truly didn’t pay much attention to those who weren’t filing. But that has all changed with the recent push to uncover tax cheats hiding money overseas. There are billions of tax dollars outstanding the IRS is determined to recover them. We haven’t heard any stories of expats being prosecuted, but criminal prosecution and hefty fines for tax evasion are possible if they IRS determines that your lack of filing was willful—meaning you were purposely hiding assets to avoid taxes.
2. You likely won’t owe taxes.
Expats often believe that if they file, they will be victims of the dreaded ‘dual-taxation’, where you are forced to pay taxes in both your host country. But the IRS has actually put several things in place to prevent this from happening. Most expats do NOT owe taxes thanks to money-saving exclusions and credits (such as the Foreign Earned Income Exclusion and the Foreign Tax Credit) and are simply ‘caught in the crossfire’ of the reporting requirements of the new initiatives. The bottom line, you probably won’t owe taxes to the US so getting caught up won’t be an overly costly endeavor.
3. You won’t pay any penalties.
In July, the IRS announced some major changes to their amnesty program, the Streamlined Filing Procedures. While there were several restrictions previously that prevented many expats from qualifying for the program, the changes have eliminated those requirements. The most exciting change is the elimination of late filing and FBAR (Foreign Bank Account Report) penalties. FBAR must be reported if you have bank account balances of $10,000 or over at any point during a tax year. Under the Streamlined Procedures, you just file the past three years’ tax returns and last six years’ FBARs and you won’t pay any penalties. Of course, this is assuming your lack of filing was non-willful. You must certify that you weren’t aware you must file in order to qualify for this program. Note: one may assume there is no way for them to prove willful non-filing, but with the advent of FATCA, that is no longer exactly true. Which brings us to #4.
FATCA, the Foreign Account Tax Compliance Act, was launched officially this year and it continues to make headlines around the world. Under FATCA, US taxpayers are required to report specified foreign assets if they exceed certain thresholds (which vary based on filing status and residency). The controversial piece of FATCA is that foreign financial institutions are now required to report on the assets of their American clients. What does this mean for you? Basically, if the IRS chooses to investigate you, your banking activities overseas will be an open book. Any and all activities are subject to interpretation and if they decide you aren’t being honest, you are ineligible for any IRS amnesty program and you will be at their mercy. And no one wants that!
5. You can’t renounce citizenship until you do.
Part of the process for fully renouncing your US citizenship is filing Form 8854, which certifies that you have been compliant on your taxes for the past 5 years. So if you are considering renunciation, being caught up on your taxes is essential to leaving your US tax obligations in the past. There are people who renounce their citizenship formally with the US embassy but choose not to file Form 8854. If you choose this route, you can formally renounce and receive a Certificate of Loss of Nationality, but you will not be relieved of your US tax filing obligations moving forward. So if your main goal is to avoid future US taxes, it’s critical that you become compliant prior to making an appointment with the embassy.
Many expats assume the process of getting caught up is daunting and expensive, but with the requirement to file only the last three tax returns and last six FBAR’s, it’s far less expensive than the penalties you may incur if the IRS sniffs you out before you come forward. If you have any questions about your back taxes, you should speak to a qualified expat tax professional who can help explain your options and the best approach to becoming compliant.
This post was written by David McKeegan, Co-Founder of Greenback Expat Tax Services. Greenback specializes in the expert preparation of US expat taxes for Americans living abroad. If you would like help getting caught up on your US tax returns contact them here: https://www.greenbacktaxservices.com/