It’s a common misconception among Americans living abroad that once they move overseas and no longer have US sourced income, they no longer have to file expat tax returns. Unfortunately, this is not the case.
Even though US citizens living abroad are likely eligible for tax breaks on their foreign income, such as the foreign tax credit, they are required to report their worldwide income on their annual US expat tax returns. If you are a US expat and have just become aware of your requirement to file your expat tax returns, don’t worry: becoming compliant may be easier than you think.
Possible Penalties and Interest on Late Expat Tax Filing
If you owe money to the IRS and have failed to pay this money by the due date (April 15th), you will be assessed penalties and interest on the balance. If you do not have a liability or, even better, expect a refund, you will not be assessed penalties and interest (unless you are required to file additional forms, see below).
There are three types of penalties that can be assessed against your delinquent Form 1040:
|Type of Penalty||Amount / Rate||Maximum|
|Failure to File||5% per month||25%|
|Failure to Pay||0.5% per month||None!|
|Interest||Market Value (~3-5%), assessed daily||None!|
The penalties above are assessed on your expat tax liability. Thus, no liability means no penalties or interest.
Come April 15th, if you are living abroad and working, you will receive an automatic extension of time to file your expat tax return until June 15th. This extension is granted to all Americans living abroad and working overseas. However, this extension does not apply to the payment due date of your expat tax liability. Therefore, if you have a balance due on your expat tax return, this balance must be paid by April 15th to avoid any assessment of interest and penalty.
It’s important to remember that if you are claiming a refund, you have three years to claim this refund before the opportunity expires. On the other hand, if you have a balance due, the IRS can pursue collection of the balance for ten years.
If you fail to file your own expat tax return, the IRS may file a substitute return on your behalf based on information that has been reported to them. When they do this, they do not make any allowances for deductions or exemptions. In other words, they do not file for all available exclusions, credits, and benefits available for expat tax returns, including the foreign tax credit. This is the IRS’ way of assessing a balance due in order to formally begin pursuit of collections of your US expat tax liability. The best way to counteract this substitute return is to file a return yourself.
If you engage in certain activities outside of the US, you may have additional tax reporting requirements. The failure to file these special forms can result in many additional (and significant) penalties. Situations that could prompt the filing of one of these “special forms” include:
|Foreign Activity||Reporting Form||Due Date|
|Owning stock in a foreign corporation||Form 5471||Same as individual tax return|
|Having financial authority or ownership in $10,000 USD or more in foreign financial accounts||FinCEN Form 114||June 30th|
|Transfer money or other property to foreign corporation||Form 926||Same as individual tax return|
|Shareholders/members of foreign partnership||Form 8865||Same as individual tax return|
This list is not comprehensive but just describes some of the more common situations for Americans living abroad. Please consult your accountant for more information on special reporting requirements of your US expat taxes.
Have Questions About Your Expat Tax Returns?
If your expat tax returns are late, we have a blog post that details programs for getting caught up. If you would like help with your expat tax returns, or would like to enlist our services to file your US expat taxes, please contact our expat tax experts.