As we approach the next tax season, we could all use some good news, right? Well, the IRS is making strides toward becoming less rigid, being more flexible, and saving the taxpayers time and money. The latest International Revenue Service Advisory Council (IRSAC) Public Report reviewed the IRS’ penalty process and recommended changes that might have a lot of taxpayers breathing a giant sigh of relief.
So Many Penalties, So Little Tax Penalty Relief
Expats are more likely than the average American to be well acquainted with the extensive list of penalties the IRS can apply when you get behind on taxes. There are penalties for failure to pay, failure to file, estimated tax penalties, failure to deposit penalties, late/missing information return penalties, and more. The list goes on and on. However, many taxpayers are eligible for a first-time abatement (FTA) to avoid a first-time failure to pay, failure to file, or failure to deposit penalty.
The Current Process
Right now, if you receive a notice from the IRS that your taxes are late, specific penalties are imposed. Many taxpayers aren’t even aware that an FTA exists that offers tax penalty relief, let alone know how to apply to use it (one of the many reasons it’s best to use a specialist for your expat taxes!). If they are aware, they must first make sure that they meet the criteria for using the waiver, as listed below:
- Filing compliance: The expat should have filed (or utilized an extension for) all other requisite tax returns.
- Payment compliance: The expat should have arranged to pay or paid all amounts due.
- Clean penalty history: The expat must have had zero prior penalties (excluding a potential estimated tax penalty) for the preceding three years.
You can apply for this abatement either by calling or sending a letter to the IRS. If you call, the best practice is to send a follow-up letter as well, verifying the information covered on the phone call. This process is time-consuming, not just for the taxpayer, but for the IRS agents as well.
The recommendation from IRSAC is that the FTA would become automatic. If passed, when you received a notice from the IRS about a penalty, they will also let you know if you qualify for the FTA and, if so, that it has been applied. However, you would still have the option to use the reasonable cause abatement in instances of death, serious illness, fire, the impossibility of obtaining documents, and other qualifying circumstances, thereby retaining your clean penalty history, and thus, eligibility for FTA tax penalty relief at a later date.
For expats, penalties can be extra punitive, and our accountants are seeing far more penalty notifications distributed by the IRS than ever before. The substantial fees and interest imposed on late filings can exceed thousands of dollars. Plus, if the total tax bill (fees, interest, and tax included) tops $52,000 (the amount that the IRS considers “seriously delinquent tax debt”), expats can have their passports revoked. The new process, if approved, could relieve more than just the headache of another bureaucratic process; it could help expats in certain situations keep their passports.
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Begin the hassle-free expat tax-filing process that we’ve perfected; get started with Greenback today.