Expats and Taxes: What to Know if You Owe Money to the IRS

Have you found yourself behind with your taxes, with an outstanding balance owed to the IRS? If so, you’re probably wondering what the options are for expats and taxes. Fortunately, several are available, and we are here to help you understand – based on the severity of your situation – how you can tackle this balance due to the IRS. Below are some of the most common scenarios taxpayers find themselves in and the available options to remedy the situation.

Do You Anticipate Owing Taxes With Your Tax Return This Year?

If you anticipate that you will have a tax liability with your filing this year, be sure to pay your balance due by the April 15th filing deadline to avoid late filing penalties. If you pay after this date, you will be hit with additional liability in the form of a failure-to-pay penalty of .5% monthly until paid plus accrued interest on top of your taxes due. If you have an outstanding balance due with your return and are unable to pay the balance by the deadline, still file your return by the deadline. While the failure-to-pay penalty is assessed as ½% monthly, filing your return past the deadline will trigger an assessment of the much higher failure-to-file penalty of 5% of unpaid taxes monthly until your tax return is filed. This failure-to-file penalty can be avoided if your return is timely filed.

Does Your Total Tax Balance Due Include Penalties?

Did you make an honest mistake on your taxes this year, or have extenuating circumstances that led to penalties assessed on your account? The IRS may allow an abatement or penalty waiver if you can demonstrate reasonable cause for being non-compliant with your taxes. There are two ways to request penalty abatement from your account:

1. First-Time Abatement for Expats and Taxes

The IRS allows a First-Time Abatement (FTA) penalty waiver for taxpayers who have had a clean record for the past three years of filings. With this FTA waiver, the IRS may be willing to abate the failure-to-file or failure-to-pay penalty for a single tax year. To qualify for the FTA penalty waiver, you must meet the following criteria:

  • You either did not previously have to file a return, or you have no penalties for the three years prior to the tax year in which you received the penalty
  • You filed all currently required returns or filed for an extension of time to file
  • You have paid or arranged to pay any outstanding tax due

Before requesting this FTA penalty waiver, you may first want to pay the tax due in full. You may then either request this waiver by calling the IRS directly over the phone or by sending a written letter to the IRS. If you choose to request the waiver via written letter, make sure to include a statement explaining your eligibility based on the above three points, include your Social Security Number and name, the tax year, and the details about the penalty you are requesting abatement for, including the penalty and the amount.

2. Reasonable Cause for Expats and Taxes

If you do not qualify for the FTA penalty waiver but feel your penalties are related to an honest mistake or extenuating circumstances, you can still try to request abatement by providing the IRS with a reasonable cause statement. A reasonable cause statement explains the situation to the IRS and demonstrates that your failure to be compliant with your taxes was non-willful, and that you attempted to file, but due to circumstances outside of your control, you were unsuccessful.

You can submit this reasonable cause statement requesting abatement of penalties to the IRS in one of two ways. You can either provide a formal submission via Form 843: Claim for Refund and Request for Abatement, and include it with your tax return, or you can submit an informal claim in the form of a written letter to the IRS with the details of your situation and the reasonable cause statement. If you choose to send a written letter to the IRS, make sure to include your Social Security Number and name, the tax year, and the specific penalty and amount for which you are requesting abatement.

Do You Need More Time to Pay Your Taxes in Full?

Depending on if you need just a little more time (up to 120 days) or a bit longer (up to three years), payment agreements and installment payment plans are available to help you pay your tax liability in full.

Could you pay your taxes in full within 120 days? Then consider a full payment agreement. If you only need a little more time to pay your taxes, you may request up to 120 days to pay your account in full. No fee is assessed for this full payment agreement. However, interest and any applicable penalties will continue to accrue until your liability is paid in full. The benefit is that the IRS will hold on any collection proceedings because the agreement is in place. You can request this agreement by calling the IRS directly at 1-800-829-1040 or filling out an application online.

Do you need a bit longer to pay your taxes? Consider an installment plan. The IRS may allow you to set up an installment plan for making a series of monthly payments to the IRS over time. The IRS does charge a user fee when you enter into a standard installment agreement.

To set up an installment agreement, you can utilize one of three methods. If you have not yet filed your return, you may submit Form 9465, Installment Agreement Request, and include it with your tax return filing. If you already filed your return, you can use the online payment agreement tool. Or, you can call the IRS directly at 800-829-1040 and set up the installment plan over the phone.

Expats and Taxes: Do you Owe More Than You Can Pay?

If you owe more than you are able to pay, the IRS does negotiate taxes through an offer in compromise (OIC). An OIC is an agreement between you and the IRS that resolves your tax liability by payment of an agreed upon amount. This option is normally only considered in extreme circumstances. You typically have to offer at least your net worth reduced by your debt. This approach can be thought of a lot like bankruptcy. To begin the process, you can use the IRS’ tool.

Are You Unable to Pay Your Tax Balance Due at All?

If you cannot pay your tax balance because doing so would prevent you from meeting your basic living expenses, you can request that the IRS delay collection until you can pay. To do this, call the IRS and speak to them directly about your situation. You may be required to fill out a collection information statement and provide proof of financial status, including information about your assets and your monthly income and expenses. If the IRS determines that you cannot pay any of your tax debt because of financial hardship, they may temporarily delay collection by reporting your account as currently not collectible until your financial condition improves. The debt won’t go away, and penalties and interest may continue to accrue during this time until the balance has been paid in full. But, you’d get a temporary reprieve.

Expats and Taxes are Greenback’s Specialty!

Greenback experts will help you find out how easy becoming tax compliant can be. Our accountants have all the experience necessary to make sure you get every deduction and exclusion. So, why not get started today?