Still haven’t filed your 2019 tax for expats? Well, there’s never been a better time to do so! With the end of the year quickly approaching, becoming compliant on your tax obligations is a must in order to avoid penalties, pay less, keep your passport, and lower your audit risk. Read on for details about why tax compliance is critical.
1. Reduce Penalties and Interest on Late Tax for Expats
Anytime you miss a tax deadline with the IRS, you can expect to face a penalty, and some interest will accrue if you owe tax. Your best plan of action is always to file as soon as possible if you miss a deadline, as penalties typically accrue over time. There are several standard penalties of which you should be aware:
- Failure to File: Expats receive an automatic two-month extension and have until June 15th to file each year, unless an extension is requested, which would make your taxes due October 15th. However, if you owe taxes, haven’t filed, and didn’t request an extension, a late payment penalty of 5% may be assessed each month until the tax is paid.
- Failure to Pay US Tax Penalty: This penalty is 0.5% of your tax due for each full month the tax isn’t paid – there is no maximum.
- Assessment of Interest on US Taxes: This rate changes every three months based on market activity. The interest is charged every day that the balance isn’t paid in full – there is no maximum.
As you can see, the longer you wait to file, the more significant your penalties and interest will be, so it’s crucial to get caught up on US taxes as soon as you can. The IRS has even more details on late filing penalties if you’re interested.
2. Audit Risk
While all US persons who meet the filing threshold must file a US Tax Return annually, expats tend to run a higher risk of being audited by the IRS. This is due to the complexity of US expat tax and the fact that it’s often more difficult to verify income earned abroad. Certain tax forms – especially those that are common for expats – also raise your risk of audit.
And let’s not forget this fact: filing late tax for expats is a red flag, so when you miss a deadline, your risk of audit continues to grow. Now, the IRS can revoke your passport once you meet the threshold of seriously delinquent tax debt. This threshold is easy for expats to meet if they are a couple of years behind, depending on their tax situation.
3. Taking Advantage of Savings
In addition to the risk of shelling out money for late-filing penalties, failing to file your tax return on time means you may lose out on some opportunities to save on taxes. As an American living and working abroad, there are certain credits, deductions, and exclusions available to you – but the caveat is, not filing on time can reduce or diminish your ability to claim the full amount. The sooner you file, the more likely you’ll be able to take advantage of the following:
- The Foreign Earned Income Exclusion, which allows you to elect to exclude up to $105,900 of foreign earned income from their 2019 US expat taxes and $103,900 for 2018,
- The Foreign Tax Credit, which allows you to offset your US expat taxes dollar for dollar with the taxes you paid in your host country, and
- The Foreign Housing Exclusion, which allows you to exclude certain household expenses that occur as a result of living abroad.
If you’ve found yourself behind filing your expat taxes, it’s a good idea to discuss your situation with an expat tax professional to ensure you take the necessary steps to become compliant on your tax obligations.
Ready to Get Caught Up On Your Late Tax for Expats?
Work with one of our expat-expert CPAs or IRS Enrolled Agents to become compliant on your US tax obligations so you can get back to enjoying your adventure abroad. Get started today.
Editor’s Note: This post was published in 2017 and updated on December 4th, 2019.