As an expat, there are things you need to be aware of and look out for when filing late taxes. You need to know how you can minimize penalties and interest, and you need to know when it’s time to hire a professional.
Late Filing Fees and Penalties
One of the biggest setbacks of filing taxes late are the fees and penalties that you can incur. The IRS can tack on penalties for filing taxes late, plus penalties for paying taxes late. And then the IRS adds interest on top of it all. But the IRS also has programs that can reduce or eliminate late penalties. Americans who live outside the US, for example, may qualify for zero penalties through the IRS’s streamlined program. The IRS still charges interest on any unpaid tax. This penalty waiver is a very attractive option for late filers. Often it’s the right solution for expats who qualify. In a another program, the IRS can waive penalties if you have a good reason why your expat tax returns are late. Examples of good reasons for filing taxes late include: you suffered a fire or flood or other natural disaster, or you were unable to get all your financial records, or you had a serious illness. The IRS can consider other factors too.
The IRS charges penalties only if you have a tax return showing a balance due. If you owe zero tax, or if you’re getting a refund, then the IRS does not apply any penalties, even if the tax return is filed after the deadline.
What are some strategies for filing taxes late?
First, take all the deductions and tax breaks you are eligible for. Your goal is to calculate the lowest possible US tax, so that your late penalties are as low as possible. For many expats, this means taking the foreign earned income exclusion and/or the foreign tax credit. If you qualify, these tax breaks can significantly reduce your US federal tax. Sometimes, expats can get their US tax all the way down to zero. If you don’t owe any tax, the IRS won’t penalize you for filing taxes late.
If you have refunds, be sure to send your expat tax returns to the IRS within three years of the original April 15th deadline. That’s how long the IRS has to pay out tax refunds. Federal tax refunds expire after this 3-year time period, meaning the IRS gets to keep the money.
When do I need a professional to help with filing taxes late?
If at any point you feel confused, or unable to answer a question on a tax form, or cannot find an answer to a question while digging through the IRS’s instructions, then you need help. This usually entails hiring a professional. Here are some tips when hiring a tax professional:
Make sure your tax professional is properly credentialed.
Certified public accountants and enrolled agents can talk to the IRS on your behalf. That means you won’t have to deal with the IRS. Plus, CPAs and EAs are trained to handle complex tax situations, and they are required to keep up-to-date with the latest rules and regulations.
Make sure your tax professional has experience with expat taxes and with late filers.
This is a rare specialty. The IRS’s procedures and programs have evolved significantly over the years, and you need a tax professional who knows just how to shepherd your tax returns through the IRS.
Can I get in trouble with the IRS or State Agencies for filing taxes late?
The IRS and state tax agencies are most interested in having you file the missing tax returns and pay any any taxes.
The biggest problem we are seeing is the IRS can ask that a person’s US passport be revoked or denied. This can have disastrous consequences in an expat‘s ability to travel. The IRS takes this action only if a person has more than $52,000 of unpaid federal taxes and hasn’t set up some sort of payment arrangement. We have also seen the IRS prevent expats from applying for Social Security retirement benefits if there are unfiled returns. This lengthens the amount of time expats need to wait before getting their first Social Security check. Less frequently, the IRS investigates situations where they suspect wrong-doing. This could include financial crimes such as tax evasion or money laundering, or it could involve audits of financial records to ensure the proper amount of income was reported and the correct amount of tax was calculated.
When will the IRS start collections proceedings after filing taxes late?
The IRS can start collections if you have not fully paid any outstanding balance after the IRS has finished processing your tax return. It can take the IRS six to eight weeks, or more, to process late tax returns. To avoid IRS collections, we recommend paying the full amount of tax, penalty and interest when you file your tax return. If you cannot afford to pay the full amount right away, the IRS will let you pay over time. The IRS has several programs for paying past-due taxes. One popular option is to set up a payment plan over six years. You should still pay as much as you can when you file, which will help keep your penalties and interest lower. Be aware that the IRS can collect past due taxes for up to 10 years after the date you actually file your federal tax return.
When do IRS penalties and interest start compounding?
For US expats living abroad, penalties and interest start accruing as follows:
|Extension?||Late filing penalty starts from||Late payment penalty starts from||Interest starts from|
|No extension on file for the year||April 15||April 15||April 15|
|Automatic 2-month extension for Expats||June 15||June 15||April 15|
|Automatic 6-month Extension||October 15||June 15 if expat (April 15 for non-expats)||April 15|
Need help getting caught up on your US expat taxes?
We know how to keep penalties to a minimum when filing taxes late. We call tell you if the IRS streamlined program is a good deal for you, and we can talk to the IRS so you don’t have to. Get started with an expert accountant at Greenback today and we’ll take the stress out of filing your US expat taxes.