Expat taxes can be nerve-wracking in the first place– but if you are entering the process late, you may feel even more apprehensive. We have compiled a list of expat questions that have caused the most concern. Let’s rip the bandage off together and find out the answers! We think the more information you have, the better you will feel.
I recently found out that I’m a US citizen by birth and have never filed a US tax return as I’ve always lived overseas. What do I need to do?
Since you were unaware of your obligation, you are eligible to catch up on your tax filing with the Streamlined Filing Procedures. To do so, you are required to file the most recent three years of tax returns and six years of FBARs.
In addition, you also need to sign Form 14653 certifying your lack of filing was non-willful. When you utilize this procedure, the failure-to-file penalties, failure-to-pay penalties, and FBAR penalties are waived.
My friend said I need to file even though I haven’t been living in the US for years. Is this true and, if so, will I be penalized?
This is true in the majority of cases. As a US person, regardless of where you live, you are required to file your Federal Tax Return. This also applies to self-employed expats.
Although there are special deductions applicable to US expats that may reduce or exclude paying taxes, if your income exceeds the filing thresholds, you still maintain a filing obligation.
How do I know if I qualify for the Streamlined Filing Procedures?
If your lack of filing was non-willful, you may qualify for the IRS Streamlined Filing Procedures. You are required to file three years of delinquent tax returns and six years of delinquent FBARs even if you did not exceed $10,000 in your bank accounts during each of those years.
What if I do not qualify for the Streamlined Filing Procedures?
If you do not qualify for Streamlined Filing Procedures, another option is the Offshore Voluntary Disclosure Program (OVDP). This may be your best option, as it offers reduced penalties. It is very risky to remain non-compliant, and should the IRS uncover your delinquency you would face harsh penalties, so it is preferable to not filing at all.
Could the IRS revoke my passport if I don’t file?
If you owe more than $50,000 in back taxes (including penalties), the US State Department could revoke your passport. If you are issued a Certification of Individuals with Seriously Delinquent Tax Debt and are unable to pay the debt in full, you could set up an installment agreement or an offer in compromise to have the certification reversed.
My separate foreign bank account balances have never reached over $10,000. Does this mean I don’t need to file the FBAR forms?
Unfortunately, no. The $10,000 threshold is for the cumulative balance of all of your foreign bank account balances. Even if the cumulative exceeds $10,000 for only one day, you need to file the FBAR form. If you are behind on filing the FBAR, you may be able to file online without penalty, as long as your non-compliance was non-willful.
Apart from FBAR reporting, you will need to file Form 8938 if you meet the criteria. This form is filed along with your Federal Tax Return. You are required to file this form if your foreign financial assets exceed the following amounts:
- For single taxpayers living abroad: $200,000 on the last day of the tax year or $300,000 at any point during the year;
- For married taxpayers filing jointly and living abroad: $400,000 on the last day of the tax year or $600,000 at any point during the year.
Please note: Married taxpayers who file a return separately from their spouse will use the single taxpayer thresholds.
Can a US state tax me even though I don’t live there anymore?
Factors concerning your domicile are key here. While you may reside elsewhere, ties such as voter registration, a driver’s license, travel to visit family, or maintaining a bank account can lead to filing requirements. You may still be considered a resident of your prior state! It is important to ensure you are compliant or take action to sever ties with the state in accordance with the tax filing requirements. Remember, the deadlines to file your state return will vary from state to state. You may be required to file to certify your residence outside the state.
I missed the April 15th deadline. Will I get a penalty for filing late?
The penalties assessed depend on when you file. As an expat, you receive an automatic two-month extension until June 15th. If you believe you won’t be able to collate your information to meet the June deadline, you can request additional time by filing an extension until October 15th. It’s also important to note these key deadlines:
- April 15th – This is the federal filing deadline. Any taxes you owe must be paid by the April 15th deadline in order to prevent interest charges.
- June 15th – This is the expat tax extension deadline for those living outside the US on April 15th who had a foreign tax home. You must file your tax return or request an extension by this date.
- October 15th –If you filed an extension, this is the final filing deadline. And if you owe the IRS, it’s imperative that you file your return by this date to avoid a failure-to-pay or failure-to-file penalty on the balance due.
- April 15th – This is the deadline for filing your Financial Bank Account Report (FBAR).
- October 15th – If you requested a six-month extension, this is the final filing deadline.
What happens to late filers? What are the penalties?
There are two penalties for late filing. The failure to file penalty is 5% of unpaid taxes for each month after your filing due date up to a maximum of 25% of total unpaid taxes. In addition the failure to pay penalty is an interest charge of 0.5% per month of total unpaid taxes and continued until it reaches 25% of your total unpaid taxes.
It is worth mentioning that at least 90% of your expected taxes due must be paid by the mid-April filing deadline even if you are planning on filing taxes late via the automatic two-month extension.
Further, you could lose entitlement to the Foreign Earner Income Exclusion (FEIE). This is a game changer, especially for those residing in a country where there are no taxes or with insufficient foreign tax credits. As a consequence of filing late, the IRS may deny the exclusion. The IRS has the authority to revoke this exclusion and once revoked it cannot be claimed for five years thereafter! This is one benefit you would not want to miss out on.
What if I filed my taxes but forgot a specific form?
If you have discovered that you didn’t include a required form, you’ll need to correct the error and file an amended return. Here are a few frequently forgotten forms that you may be required to file:
- Form 5471– Shareholder in a foreign corporation
- Form 8621– Report by a shareholder of a Passive Foreign Investment Company (PFIC)
- Form 8938– FATCA Form to declare offshore foreign financial accounts and assets
Generally, the IRS will not enforce any penalty if you subsequently file your tax returns late or file amended tax returns.
Have more questions about your specific tax situation?
There’s no reason to let your unanswered questions stress you out. Our expat tax experts are ready to help you get the answers you need. Contact Greenback today!