How The IRS’ Mistake Affects Expats Who Are Married Filing Separately

How The IRS’ Mistake Affects Expats Who Are Married Filing Separately
Updated on May 13, 2024

The Taxpayer Advocate Service, the task force whose objective is to review the IRS and make recommendations to Congress, recently made the public aware that the IRS made a mistake—a big mistake. If you’re a married taxpayer filing separately, find out what implications this could have for you as an expat.

What Happened?

Think back to the Tax Cuts and Jobs Act (TCJA), enacted in 2017. This act eliminated the personal exemption for the next eight years (2018–2025). The IRS attempted to give married taxpayers filing separately a break by setting the filing threshold at $5, which was reflected on the IRS website and the instructions for the 1040.

But in January of 2019, the IRS issued Publication 54 amidst the government shutdown, which likely curtailed the review time of the publication. This publication has since been removed from the IRS website. Publication 54 was specifically for US citizens and nonresident aliens living abroad. Publication 54 said that married taxpayers filing separately must only file tax returns if their income exceeded $12,000 for the applicable tax year, when the threshold is actually $5. For those who are married filing jointly, it said the threshold was $0 when it should have been $5. The IRS issued a statement noting this error in September, but for those who don’t check in frequently on the IRS, this was not particularly helpful.

Thankfully, anyone who uses the Greenback website has used the correct thresholds. But, those who relied on the information from Publication 54 are not as fortunate.

Why Is This a Problem for Expats?

What the Taxpayer Advocate Service noted is that the IRS hasn’t offered automatic penalty relief to those affected by the error or revised Publication 54. For expats, the ramifications of this mistake could be disastrous. Those who should have filed may think they are compliant when they are now out of compliance and racking up penalties. Take, for example, a married spouse who only made $10,000 last year and believes they are not under any obligation to file. If they had foreign bank account reports that are out of compliance or foreign assets that should have been reported, the penalties and interest add up quickly. If they add up to more than $52,000, the IRS considers that amount “seriously delinquent tax debt,” and their passport is now at risk.

With any luck, the IRS will issue a statement and waive all penalties involved with the error. In the meantime, it’s difficult to know what unfair consequences taxpayers will face. Expats are in a tough spot here. And this mistake brings up questions of how complicated the American tax code is, and how the IRS is supposed to manage the immense changes from the Tax Cuts and Jobs Act while having their workforce reduced. Perhaps this mistake will shed light on and increase empathy for citizen taxpayers who are trying to navigate the increasingly complex tax code with faulty guidance from the IRS. In the long run, expats, too, deserve some compassion for the lack of awareness around citizenship-based taxation, and its sometimes financially devastating effects.

Ready to Get Your Taxes in Order?

As always, the most prudent course of action is to get caught up on your taxes with the help of a specialist. Get started with Greenback now.

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