Expats: Have You Paid Your Taxes?

February 2018

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How to Minimize Your Risk of Tax Penalties for Unpaid U.S. Income Taxes

Of the more than nine million Americans currently living abroad, many are often unaware that–as U.S. citizens or green card holders–they are still bound by U.S. tax laws and are required to file U.S. income tax returns each year.  As an expat, if you neglect to file, but were not willfully negligent–meaning you had an inadvertent misunderstanding of the law–you may be able to use an amnesty program known as streamlined offshore filing to disclose unreported foreign assets and income and file related delinquent information returns, while avoiding potential penalties from the IRS.

The majority of filers who pay tax in their resident foreign country may not owe any U.S. tax, and by utilizing streamlined offshore filing, Americans abroad can ensure they are not subjecting themselves–or their descendants and other beneficiaries of their estates–to potential penalties for their previous failure to comply with U.S. tax obligations, and will also pay no penalty if no taxes are owed.

According to taxanalyst.com, in 2015, the only taxpayers who saw an increase in their chances of being audited were those living overseas.  We estimate that the IRS audits roughly 4.3% of tax returns filed by Americans living outside the U.S, compared to 0.8% of those returns filed by Americans living stateside. According to an IRS study completed in 2014, about 450,000 Americans filed an income tax return claiming the Foreign Earned Income Exclusion.  The same report also showed that roughly 1.2 million Americans filed returns claiming a credit for foreign tax, which leaves more than seven million Americans living outside the U.S who did not, and could potentially face penalties from the IRS if audited.  

U.S. income tax is complicated enough for those of us living in the U.S. Living abroad adds an even greater level of complexity. Here are five myths and misunderstandings about U.S. tax obligations for American expats:
 

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Myth #1: I don’t have to file a U.S. tax return because I don’t live in the U.S.

In order to avoid penalties in the U.S., Americans living abroad must still file a U.S. tax return.  
 
 

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Myth #2: I don’t have to file a U.S. return since I don’t owe any U.S. tax.

In general, if you earn more than $10,350 you should file an income tax return, even if you are an expat American.  Expats are able to take advantage of the Foreign Earned Income Exclusion or claim a foreign tax credit, however in order to do so, you must file an income tax return.
 
 

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Myth #3: If I’ve not filed in a long time, I’m in big trouble and will face penalties.

If you were not willfully negligent–meaning that you had an inadvertent misunderstanding of the law–you may be eligible to use the current streamlined offshore filing procedure where there is no penalty for those who qualify.
 
 

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Myth #4: I don’t have to file a foreign financial account disclosure form if I have an account balance of less than $10,000 dollars.

In order to avoid filing the foreign financial account disclosure forms, all of your financial accounts must be less than $10,000.  And if at any time during the year the aggregate value of all of your accounts–including securities accounts–was greater than $10,000, you are required to file.
 
 

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Myth #5: I don’t have to report contributions to my pension/retirement savings in a foreign country because it is not paid directly to me.

The benefit of pension plans, like U.S. IRA’s for example, is that you get tax-deferred savings, and in the case of a Roth IRA, tax avoidance when you take a distribution.  In many countries outside the U.S. pension plans are allowed tax deferral and tax avoidance strategies under local laws.  However, under U.S. laws, foreign pension plans are generally not compliant with U.S. income tax rules and therefore, leveraging a foreign pension for tax deferral or tax avoidance is not allowed.  In some cases, there may be a favorable income tax treaty where the tax deferral or avoidance is allowed, but this is on a country-by-country basis.
 

 
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