There are lots of scare stories going around about the possible consequences for not filing U.S. taxes as an expat. You may have heard for example about U.S. passports being revoked, sizable FBAR penalties, and banks closing expats’ accounts because of FATCA. So if you’re an expat who’s behind with their U.S. tax filing, you may well be at least a little bit concerned.
We’re here to let you know however about several good reasons why, so long as you act now rather than do nothing, you won’t have to worry anymore.
Reason 1 – You’re not alone in choosing to catch up
The U.S. and African minnow Eritrea are the only two countries in the world that require expats to file, so it’s not surprising that U.S. expats find it shocking when they first find out. But you’re in good company: every year, thousands of U.S. expats who weren’t previously aware that they had to file U.S. taxes from abroad find out and choose to catch up and become compliant like you.
Reason 2 – There’s a way to catch up without facing any penalties
Now for the best news you’re going to hear all week: there’s a special IRS amnesty program for expats who are behind with their U.S. tax filing because they weren’t previously aware that they had to file that lets them catch up without facing any penalties. It’s called the Streamlined Procedure, and to catch up you have to file your last 3 federal tax returns, your last 6 FBARs (if required), self-certify that you’re previous failure to comply wasn’t willful avoidance, and pay any U.S. back taxes that you may owe. Talking of back taxes…
Reason 3 – You probably won’t owe any U.S. back taxes (but you still have to file)
More good news: there are some exclusions available to expats to prevent them from paying U.S. taxes on top of taxes in their country of residence. In fact, for the first up to around $100,000 of expats’ income, there’s no U.S. tax due whether you’ve paid taxes in another country or not, so long as you meet one of two conditions.
This particular exclusion is called the Foreign Earned Income Exclusion, and it allows expats to exclude up to around $100,000 of their income (the exact figure rises a little each year) from U.S. tax if they can prove either that they are a permanent resident in another country, or that they spend at least 330 days outside the U.S. in a 365 day period that overlaps with the tax year.
Some expats who pay taxes in another country though may be better off claiming the Foreign Tax Credit, which gives a $1 tax credit for every $1 of tax paid abroad.
There are some other exclusions available to expats too, such as the Foreign Housing Exclusion, however in all cases you have to file to claim them. The good news though is that all these exclusions can be claimed in retrospect if you catch up using the Streamlined Procedure, so that with the right strategy given their particular circumstances most expats won’t end up owing the IRS a dime.
Reason 4 – Dreaded FBARs aren’t in fact that scary
FBARs, or Foreign Bank Account Reports, must be filed by expats who have at least $10,000 in total in bank and other financial accounts held abroad at any time during the tax year.
The good news is that FBARs are fairly straightforward to file. FBARs are filed online to FinCEN (form 114), and are due by October 15th. You have to provide your name and contact details, along with details about all your accounts (account numbers, maximum balances etc), and details about the banks or other financial firms where your accounts are help.
Most foreign financial firms are providing the same information to the IRS now, so while it’s a filing requirement that shouldn’t be ignored any longer, it’s also not too hard a one to rectify.
Reason 5 – Getting help doesn’t cost the earth
Some expats are afraid that the cost of hiring a expat tax specialist firm to prepare their back taxes is prohibitive, however in actual fact it’s not. In fact, expat taxes specialists normally save expats more money than they cost, as they are experts at finding the right strategy and claiming the right exemptions depending on each expat’s circumstances. So at the very least get a quote from an expat specialist firm before deciding to try and go it alone.
4 comments on “Reasons Not To Worry If You’re Behind With Your Expat Filing”
Or, you could just do like millions are and ignoring the usa as the declining arrogant bully it is. C’mon people! Are you free citizens of the world? If you think so, behave as such, and ignore this evil entity. And being asked to pay US$2350 to renounce an unwanted and burdensome citizenship?? Ridiculous. Don’t be sheep lining up for a fleecing.
I notice that the article presents becoming U.S. tax compliant as if it were a breeze. What is not discussed is what happens after becoming compliant. Any expat should be fully advised and this would include what to expect beyond possible penalties and so on at the point of entry into the U.S. tax system.
Where is the reality that the U.S. DOES NOT recognize the government-registered tax-deferral plans of other countries? This remains particularly offensive since many basically mirror those of the U.S. (IRAs, Roth IRAs, 529 plans); no FTCs available for this unearned income. Some include government contributions (the CAD RDSP for example) which the U.S. has no business taxing. What about the situation of Australians with the unique Superannuation system? How about taxing capital gains over $250k from the sale of a principal residence in countries like the U.K. and Canada? And the biggest surprise of all-PFICs. Anyone owning non-US mutual funds is in for an incredibly rude surprise.
As far as for “there are lots of stories going around….” when I was first confronted with these issues in late 2011, I know exactly where these stories originated-from the IRS Commissioner Douglas Shulman and the tax compliance community.
“You probably won’t owe” + “expat taxes specialists normally save expats more money than they cost” – this does not make sense to me. In Canada, it is common to spend $1000 for a 1040 plus $500 minimum for the simpler forms like FBAR and much more for 3520, 8938, 5471 and 8621. Easy to spend well over $1500 when nothing is owed.
There are very good reasons people who are not currently in the U.S. tax system are choosing not to enter. No amount of sugar-coating the reality of what is really involved will change that.
This article is tantamount to the free crack the pusher hands out on the street corner: Once you bite, you’re hooked for life. Nothing about dealing with the IRS or FinCEN is easy or inexpensive. If you’ve never been in the system due to having never lived in the US, for example, “coming clean” can actually ruin you financially regardless of what voluntary disclosure program may or may not be in effect. You are guilty until you can prove your innocence.
Unfortunately, FATCA, a tool supposedly designed to catch US resident tax evaders, has become the sledgehammer to identify non-wealthy expat “miscreants” who receive no service or protection from the US and who already pay taxes where they live. But they’re easy targets!
The author’s statement that “In fact, for the first up to around $100,000 of expats’ income, there’s no U.S. tax due” is missing a vital word in front of “income”…it should be “earned income”. If you’re a retiree living off a pension or investments the exclusion does not apply. Even if you live in a country with a tax treaty and ultimately owe $0 US taxes, your friendly compliance expert will not come so cheap.
GaryC writes:
“This article is tantamount to the free crack the pusher hands out on the street corner: Once you bite, you’re hooked for life. Nothing about dealing with the IRS or FinCEN is easy or inexpensive. If you’ve never been in the system due to having never lived in the US, for example, “coming clean” can actually ruin you financially regardless of what voluntary disclosure program may or may not be in effect.”
I would add that:
Any discussion about entering the U.S. tax system MUST include a discussion of what it means to actually live outside the U.S. if you are a “tax compliant” “U.S. Person” abroad. GaryC states that entering the system can “ruin you financially”. This is true in two ways:
A. The costs to enter the system can reveal all kinds of U.S. taxes owing that one would/could never imagine existed. Examples include (but are not limited to) PFIC and CFC problems.
B. Once in he system Americans abroad have really agreed that they will live their lives according to the Internal Revenue Code. This will make their lives extremely difficult because it is always incompatible with the tax rules of the country of residence. For many people, entering the U.S. tax system is actually (although they don’t know it at the time) the first step to renunciation.
Bottom line is this:
You can have U.S. citizenship or you engage in financial planning and investing like your friends and neighbors, in your country of residence. But, you can’t have BOTH.
There are good reasons why people are renouncing U.S. citizenship!
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