Back Taxes for American Expats: What You Need to Know (and How to Fix It)
Here’s the relief you need: The IRS allows Americans living abroad an automatic two-month extension to file their tax returns, moving the deadline from April 15 to June 15 each year. Even better? If you’re behind on your taxes, the IRS offers Streamlined Filing Compliance Procedures specifically designed for expats who failed to report foreign income due to non-willful conduct, with complete penalty relief.
Back taxes are simply unpaid taxes from previous years, whether you filed late, didn’t file at all, or underpaid what you owed. For American expats, back taxes often accumulate because many don’t realize they need to file US returns while living abroad, regardless of where their income comes from or whether they owe any US tax.
You’re not alone if you’re feeling overwhelmed about years of unfiled returns or unpaid taxes. At Greenback Tax Services, we’ve helped over 23,000 expats handle this situation, filing over 71,000 returns while maintaining a 4.9-star average on TrustPilot. Most importantly, we’ve seen that most of our clients owe little to nothing once they correctly claim expat tax benefits like the Foreign Earned Income Exclusion and Foreign Tax Credit.
What Are Back Taxes?
Back taxes are taxes that were not completely paid when due, typically from previous years. For American expats, back taxes usually fall into three categories:
- Unfiled Returns: You never filed a US tax return while living abroad for one or more years. This is surprisingly common since many expats don’t realize that US citizens must file annual returns regardless of where they live.
- Underpaid Taxes: You filed returns but didn’t pay the full amount owed, often because you weren’t aware of expat-specific tax benefits that could have reduced or eliminated your tax liability.
- Late Filed Returns: You eventually filed but missed the deadline, potentially triggering penalties and interest charges.
Key Point: There is no statute of limitations on unfiled tax returns—the IRS can require filing indefinitely, though it typically focuses on the most recent six years for compliance purposes.
Why Do Back Taxes Happen to Expats?
American expats face a unique challenge: the US is one of the few countries that taxes based on citizenship rather than residency. This means you’re required to file US tax returns even if you:
- Live permanently in another country
- Earn all your income from foreign sources
- Already pay taxes to your country of residence
- Haven’t set foot in the US for years
Many expats discover their filing obligations only when they try to renew their US passport, apply for a mortgage, or receive an IRS notice. Common scenarios include:
- Corporate expats who assumed their employer handled everything
- Entrepreneurs who thought foreign business income wasn’t taxable in the US
- Digital nomads who believed frequent travel exempted them from filing
- Retirees abroad who didn’t realize that foreign pensions must be reported
What Happens If I Owe Back Taxes?
The consequences of owing back taxes vary depending on how long you’ve been behind and whether you filed returns:
Penalties and Interest
The failure-to-file penalty is 5% of unpaid taxes for each month your return is late, up to a maximum of 25%. The failure-to-pay penalty is 0.5% of unpaid taxes per month, also capping at 25%.
For returns filed more than 60 days late, there’s a minimum penalty of $525 for 2025 returns or 100% of the tax owed, whichever is less.
Interest compounds daily on both taxes and penalties until paid in full.
IRS Collection Actions
If you don’t respond to IRS notices, they may:
- File a Substitute for Return (SFR) based on income reported by third parties
- Issue tax liens against your property
- Levy bank accounts or wages (though this is rare for expats)
- Prevent passport renewal for seriously delinquent tax debt over $59,000
Automatic Extension Relief
US citizens living abroad automatically receive a two-month extension to file, moving the deadline from April 15 to June 15. For 2025, since June 15 falls on a Sunday, the deadline moves to June 16, 2025.
You can request an additional extension to October 15 by filing Form 4868, giving you a total of six months to file without penalties.
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How Much Will I Owe?
Here’s where most expats get relief: the vast majority end up owing little to nothing once they properly claim available tax benefits.
Foreign Earned Income Exclusion (FEIE)
For 2025, you can exclude up to $130,000 of foreign earned income from US taxation using Form 2555 if you meet either the Physical Presence Test (330 days abroad in any 12-month period) or Bona Fide Residence Test (genuine foreign residence for a full tax year).
Example: Sarah lives in Germany and earns €80,000 ($88,000). Using the FEIE, she excludes her entire salary from US taxation, owing $0 in US income tax.
Foreign Tax Credit (FTC)
If you pay income taxes to your country of residence, you can often claim a dollar-for-dollar credit against your US tax liability using Form 1116. This is particularly beneficial in high-tax countries.
Example: Mark lives in France, earns $150,000, and pays $45,000 in French income taxes. After excluding $130,000 through the FEIE, he owes US tax on $20,000. His $45,000 French tax credit completely eliminates his $3,000 US tax liability.
Combined Strategies
Many expats use both the FEIE and Foreign Tax Credit strategically on different types of income to minimize their overall tax burden.
How Do I Get Back into Compliance?
If you’re behind on filing, you have several options depending on your situation:
Option 1: File Current and Missing Returns
You can often file your missing returns if you don’t owe significant taxes (common for expats using FEIE/FTC). While you may face some penalties, they’re typically manageable compared to the peace of mind of being compliant.
Option 2: Streamlined Filing Compliance Procedures
The Streamlined Foreign Procedures allow qualifying expats to file the last three years of tax returns and six years of FBARs with complete penalty relief if your non-compliance was non-willful.
To qualify, you must:
- Have lived outside the US for at least 330 days in one of the last three years
- Certify that your failure to file was non-willful (due to a misunderstanding, not intentional evasion)
- Not under IRS examination
What You’ll Need to File:
- Three years of tax returns (2022, 2023, 2024 if filing in 2025)
- Six years of FBAR reports for foreign accounts over $10,000 aggregate
- Form 14653 certification of non-willfulness
Option 3: Current Year Filing with Catch-Up Plan
Suppose you’re not eligible for streamlined procedures. In that case, you can file your current year return to stop additional penalties from accruing, then work with a tax professional to address prior years strategically.
Common Myths About Expat Back Taxes
Myth: “I don’t need to file if I don’t owe US taxes.”
Reality: Filing requirements are based on income thresholds, not whether you owe tax. You must file even if you expect to owe $0.
Myth: “The IRS can’t find me overseas.”
Reality: Foreign banks report US account holders, employers issue tax documents, and the IRS has extensive international information-sharing agreements.
Myth: “I’ll owe double taxes on everything.”
Reality: Tax treaties and credits like the FEIE and FTC are specifically designed to prevent double taxation.
Myth: “It’s too late to fix years of non-filing.”
Reality: The IRS offers multiple amnesty programs, and most expats discover they owed little to nothing anyway.
What Should I Do Next?
If you’ve never filed: Consider the Streamlined Filing Compliance Procedures if you qualify, or read our guide for expats who never filed taxes.
If you’re just behind a year or two: Review our article on filing taxes late as an expat for specific guidance on catching up quickly.
Remember: No matter how late, messy, or complex your return may be, we can help. Knowing that your taxes were done right will give you peace of mind.
Get Started Today
Have questions about the process or next steps? Contact us, and one of our customer champions will gladly help. If you need specific advice on your tax situation, click below to get a consultation with one of our expat tax experts.
This article is for informational purposes only and does not constitute tax advice. Individual circumstances vary, and you should consult with a qualified tax professional regarding your specific situation. Tax laws and procedures are subject to change.
