Do Americans Need to File US Expat Tax Returns?

State Expatriate Return

This was originally published April 3, 2013 and was updated June 21, 2014 with information relevant to the 2013 and 2014 tax years.

The US requires its citizens to file US income tax returns and report their worldwide income regardless of where they live or how long they have lived abroad. Most expats are also subject to income tax in the country where they reside. The result can be that an expat is subject to tax for foreign income in two countries, which is double taxation.

Exclusions and Credits On Tax For Foreign Income

There are some remedies designed to offset double taxation. The typical ways are for an expat to reduce his or her US taxes through the Foreign Earned Income Exclusion (FEIE), Foreign Housing Exclusion and Foreign Tax Credit. However, the FEIE covers a limited amount of income, expense thresholds must be met in order to benefit from the Foreign Housing Exclusion, and US tax limits apply to foreign tax credits. Some expats who earn more than $105,000 per year find themselves owing US tax on their income in spite of their exclusions, deductions and credits.

Any expat who pays tax for foreign income and owes US tax should calculate the benefits of claiming or not claiming the FEIE. Generally, if you live in a country with a tax rate higher than your US tax rate, your US taxes may be reduced by claiming no FEIE. It is a common scenario for expats with high earnings to owe less US tax by choosing not to claim an FEIE because they are allowed a higher foreign tax credit. One reason this works is because you are not allowed to claim a foreign tax credit on the foreign tax that is allocated to your excluded income.

Your US income tax return may not be the only filing requirement you have. If any of your foreign accounts meet the FBAR reporting threshold of $10,000 any time during a year, you must file FBAR Report FinCEN 114 for that year. Generally, to get caught up you have to file your FBAR reports for the last six years. Most US owners or partial interest owners of foreign business entities and certain foreign trusts have to file the specific required disclosure form.

Past Due Tax Returns: The Benefits of Voluntary Compliance

If you are one of the millions of expats who has not filed a US tax return for years, you should consider filing your US tax returns soon, even if you owe any tax for foreign income or foreign assets. With the passing of FATCA in 2010, the enforcement of global US tax compliance has become much stronger. Your foreign financial institution may be required to report your foreign income and asset information to the IRS as early as 2014.

If you voluntarily comply and file past due tax returns, it is possible your penalties will be abated. In September 2012, the IRS approved streamlined filing procedures that apply to some expats. If you qualify and file according to these procedures, all penalties could be waived depending on your particular circumstances.

If you do not qualify to use the streamlined filing procedures, or if you fear criminal prosecution for tax evasion or failing to file, it might be in your best interest to file according to the IRS Offshore Voluntary Disclosure Program (OVDP). This program allows US owners of foreign accounts, foreign entities or foreign trusts to become compliant with prior years’ returns and to avoid penalties and criminal prosecution.

If you do not have any foreign accounts or interests in foreign entities that should have been reported on disclosure returns, it might be best for you to file and then make a simple request asking the IRS to abate your penalties. They will be willing to waive penalties if you can show you had reasonable cause for the late filings and late payments.

According to the IRS, they will generally grant reasonable cause relief “when you can demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them,” (IRS Fact Sheet, FS 2011-13, December 2011). Reasonable cause may be much easier for you to prove if you willingly get up to date with your filing requirements for your tax for foreign income.

Time is of the essence for you to voluntarily bring your US tax filings up to date. Both the streamlined filing procedures and the OVDP could be changed or could end. There is literally no time like the present to file past due US returns on tax for foreign income. The longer you wait, the more likely it is that today’s benefits of voluntary compliance will disappear, and you could face penalties in the future that would be waived today.

Help With Tax For Foreign Income

For more information on the Foreign Earned Income Exclusion, check out this informative video. If you have any questions about your FBAR filing requirements or need help preparing your foreign income tax returns, please contact us.