Most Important Facts for Expats Who Owe Money to the IRS

Filing US Taxes Abroad and Paying Taxes

While expats get an automatic two-month extension filing US taxes abroad, the April 15 Deadline (April 17, in 2018) is when payment is due if you owe taxes. Many expats are surprised to learn that even though filing by June 15 meets the deadline, this is two months past the deadline to pay taxes, so penalties and interest have already accrued. April 17 is nearly here, so below are the facts you need to know about paying your US taxes!

Failure-to-Pay and Failure-to-File Penalty

If you file your Federal Tax Return after your extended deadline, you can be charged a failure-to-file penalty, which is generally ten times higher than the failure-to-pay penalty. Even if you can’t pay all the taxes you owe, filing on time is beneficial because you avoid the failure-to-file penalty. This penalty is 5% of the unpaid taxes for each month it remains unpaid; however, it will not exceed 25% of your total tax bill.

The failure-to-pay penalty is ½% of the unpaid tax each month. Failure-to-pay penalties begins to accrue the day after your taxes were due. However, if you owe both of these penalties in one month, the maximum penalty for that month will be 5%.

Remember, expats get an automatic two-month extension, and while failure-to-pay penalties will kick in after April 17, failure-to-file penalties will not be assessed until after June 15. If you show just cause as to why you didn’t pay or file your return on time, you will likely avoid these penalties.

Filing your Return Late

The IRS doesn’t take kindly to those who don’t file. If your return is filed more than 60 days after the deadline (or the extension if you received one), you will pay a minimum penalty which is $135 or 100% of the taxes owed, whichever is smaller. Even if you miss the deadline, get your Federal Tax Return filed right away to avoid this hefty penalty.

Interest Penalties

The IRS charges interest daily on the amount of tax owed, penalties, and accrued interest until the balance is paid in full. Each quarter, the IRS determines the rate of interest, as of December 31, 2017 the interest rate was 4% annualized for underpayment. Interest penalties are rarely abated, reduced, or otherwise removed by the IRS. The IRS will correct interest penalty calculations if the tax account has retroactive changes; for example, if other penalties are abated or the tax liability is recalculated.

Remember, an extension of time to file your tax return is not an extension to pay the tax owed!

Options for Paying Taxes

While expats frequently do not owe US taxes, plenty of them do! Penalties and interest stop accruing when you pay your balance in full. If you owe taxes but can’t pay the IRS in full, the best option is to pay what you can, as soon as you can. You have a couple of options if you can’t pay your entire tax bill right away:

  • Borrow the money. You might be able to get a loan from a bank or other source at a lower interest rate than the IRS charges. Check with your bank or financial advisor for further details.
  • Agree to a short-term payment plan. This is an agreement with the IRS that you will pay your owed taxes within 120 days. There is no fee, but tax, interest, and penalties must be under $100,000. During repayment, interest and penalties will accrue until the balance is paid in full.
  • Agree to a long-term payment plan. This is an agreement whereby you agree to pay a certain amount each month up to 72 months. This option is only available to those who owe less than $50,000. For direct debit agreements, the fee is $31 to set up the installment agreement. Setting up an installment agreement not facilitated by direct debit costs $149. You can apply for an Online Payment Agreement on the IRS website.
  • Make an offer in compromise. This is not always successful, but you can offer the IRS a certain amount of money to settle your debt for less than the full amount. The IRS is more likely to accept such an agreement if the offer is reasonable and represents the most they will receive from you within an acceptable period of time.

Penalty Relief

In some situations taxpayers may request relief from penalties assessed by the IRS. Each situation must be considered on an individual basis, but you may be eligible to request abatement (reduction or removal) of penalties with a First Time Penalty Abatement or Administrative Waiver. Penalties that may be reduced include:

  • Failure-to-file
  • Failure-to-pay
  • Failure-to-deposit (for example, estimated taxes)

Other situations where the IRS may reduce penalties include reasonable cause and statutory exceptions. Speak to your accountant to find out if you should request consideration from the IRS.

The IRS will not abate interest in most situations, and interest will continue to accrue until balance is paid in full.

Need Help Filing US Taxes Abroad?

If you would like assistance filing US taxes abroad, our expert CPAs and IRS Enrolled Agents will help you avoid penalties and become compliant! Get started with us today!

Originally published in 2014; updated April 4, 2018.

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