We get it! Tax deadlines come around a lot faster than you might expect. Nevertheless, it’s best to file as early as possible to put your mind at ease and avoid the consequences of filing taxes late. If you do need to file after the deadline, be aware of the potential fees, penalties, and risks of noncompliance.
Before we even begin talking about filing taxes late, it’s important to know that you as an expat have options to extend your deadline.
As a taxpayer whose residence and main place of employment is outside the US, the IRS grants you an automatic two-month extension to mid-June that you don’t have to proactively apply for. It’s important to note, however, that you will need to attach a statement along with your submitted tax return in June explaining why you qualified for the automatic extension.
If you expect that you’ll need even more time than that, filling out Form 4868, the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, will give you until mid-October to file your return.
Consequences of Filing Taxes Late
If you end up filing taxes late for any reason, you may end up facing penalties and losing benefits related to your foreign income and assets.
The Longer You Wait, the More Interest You’ll Owe
Tax extensions give you more time to file your return, but they don’t give you more time to pay. Once the April deadline passes, interest starts accruing based on the amount of tax you owe.
The interest rate for individual taxpayers is equal to the federal short-term rate (which varies over time) plus 3%. The IRS announces the new federal short-term rate in their Newsroom every three months.
You Might Have to Pay IRS Penalties
There are two penalties that the IRS assesses for late taxes:
1. Failure to File Penalty
The Failure to File penalty is charged if you file your actual return past the deadline. Normally, this penalty is 5% of unpaid taxes for each month beyond your filing deadline up to a maximum of 25% of your unpaid taxes due.
2. Failure to Pay Penalty
The Failure to Pay penalty is levied on all taxes due that are not paid by the filing deadline. This penalty is normally an interest charge of 0.5% per month on the basis of your total unpaid taxes. This penalty can continue until it reaches 25% of your total unpaid taxes.
At least 90% of your expected taxes due must be paid by the mid-April filing deadline – even if you plan on filing taxes late via the automatic two-month extension. Otherwise, you may face a Failure to Pay penalty even if you file your return on time.
In many cases, we find that expats do not owe taxes due to foreign tax credit and foreign earned income exclusion. But just in case, it’s good to file in April or file an extension until October, to make sure you won’t have to pay penalties.
You Could Miss Out on Big Tax Breaks
What may be perhaps more of an issue with filing late is the expat-tax privileges you might lose.
For expats filing late taxes, there is no guarantee of eligibility for the Foreign Earned Income Exclusion – which allows you to exclude over $100,000 of foreign-earned income from your tax bill.
Claiming this exclusion requires that you file Form 2555 with your tax return in a timely manner. If you don’t file in time, the IRS reserves the right to revoke your ability to use the FEIE. Once revoked, you cannot claim it for at least five years.
The FEIE can save you thousands per year in taxable income alone, so it’s definitely a benefit you want to keep!
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What to Do If You’re Behind
Of course, the best way to avoid all these potential penalties is to stay compliant and file your tax returns in a timely manner each year. That said, if you do find yourself falling behind and filing taxes late, you still have options!
The IRS has programs in place to get caught up, especially for expats who did not know they needed to file. If you are just 1 year late, then it’s better to file as quickly as possible.
If you were unaware you needed to file and are several years late, you may be a good match for the Streamlined Filing Procedures. It’s better to get caught up with the IRS late than not at all, and it’s best if you consult a registered professional to help you understand how best to go about it.
Have Specific Questions Related to Your US Expat Tax Return?
We can help! Our dedicated team of CPAs and IRS Enrolled Agents have specific expat tax expertise to help Americans abroad navigate their US taxes in a way that makes sense for their individual situation – Get started today.