Figuring out your tax obligations as a U.S. expat tends to be extremely complicated. Not only does an American living abroad face the same income tax return filing requirements as domestic citizens and residents, but they also have to include several additional forms and filings as well. Most of these requirements are conditional, so a single taxpayer probably will not need to include all the extras with their return. Some, however, are quite common among those who live overseas, including Form 2555 – used in conjunction with the foreign earned income exclusion – and FinCEN Form 114, which is used to file an FBAR. If you are a U.S. citizen or permanent resident living abroad and are unsure about your filing obligations or what happens if you don’t file, keep reading as the international tax accountantsat U.S. Tax Help explain.
Filing Requirements for Americans Living in Another Country
As mentioned above, expats are required to submit the same income tax return – IRS Form 1040 – to the federal government as everyone else. That’s because the U.S. is one of only two countries in the world to tax based on citizenship instead of location. (The other country? Eritrea.) Before you start worrying about your U.S. tax bill, though, there’s some good news: expats are eligible for a number of tax provisions that can significantly reduce, or even eliminate, their financial obligations to the Internal Revenue Service.
One of the most popular of these provisions is the foreign earned income exclusion, which allows expats to reduce their taxable income by more than $100,000, provided it’s “earned income” – meaning that it was gained through active employment, rather than through a passive source like rent or dividends. This tax break isn’t automatic, though; you’ll have to meet certain qualifications and file Form 2555, Foreign Earned Income, with your tax return. Other breaks may also be available to offset the cost of housing or other necessities, and any income taxed by another country may qualify for the Foreign Tax Credit.
Unfortunately, these helpful tax provisions are accompanied by equally extensive reporting requirements for expats with foreign assets. Two thresholds in particular should be observed: Expats with more than $10,000 in financial assets must file an FBAR, and those with more than $200,000 will likely need to file Form 8938, Statement of Specified Foreign Financial Assets, in compliance with the Foreign Account Tax Compliance Act. Failure to meet IRS requirements for either may carry harsh penalties.
IRS Penalties for Expats Who Don’t File
While failure to file the forms for the tax breaks you want will only result in the loss of that tax relief, the mandatory paperwork – your income tax return and asset reports, to name two examples – carries significant penalties if you don’t file them on time. Below are some of the penalties for filing delinquent expat taxes.
Failure to File an Income Tax Return
There are three main financial penalties for neglecting to file your tax return on time: the “failure to file” penalty, the “failure to pay” penalty, or interest accrued on missed payments. Each is calculated in its own way, though they are generally based on some percentage of your unpaid tax debt. The failure to file penalty is the most expensive; you can be charged 5% of the amount you owe, with the fine increasing by an additional 5% each month (up to a maximum of 25% of your bill). By comparison, the failure to pay penalty is more reasonable, with a rate of 0.5% per month (also up to a maximum of 25%).
Interest for missed payments can affect expats, even if they file on time. Those living abroad on the prescribed tax deadline are generally granted an automatic 2-month extension to file, with the option of pushing the due date back even further. However, interest will begin accruing on the April deadline and continue until the tax bill is settled, regardless of any extensions; a qualified professional can further explain the intricacies of preparing a U.S. expat tax return.
FBAR and FATCA
Failing to file the necessary FBAR or FATCA forms can have even steeper costs than those listed above. For example, if you were supposed to file Form 8938 under FATCA but neglected to do so, you may be subject to a $10,000 penalty, with the possibility of an additional $50,000 for continued failure to file and a fine valued at 40% of the value of the undisclosed assets. For FBAR, the maximum penalty for failing to file is almost $87,000 if the taxpayer has a pattern of negligence.
Keep in mind that while there may be some overlap between FBAR filings and FATCA filings, completing one has no bearing on whether you must complete the other. Make sure you are meeting all your tax requirements as an expat so you can avoid any fines, fees, or penalties.
Accountant for American Expats Filing Taxes from Abroad
If you or someone you know is looking to file their income tax return from another country before the deadline – or if you’re unsure whether to file at all – turn to the international tax specialists at U.S. Tax Help today. Our skilled accountants can look at what filing requirements you may have missed and advise you on the best course of action, which may include the IRS’s streamlined procedures for filing delinquent returns. Those who qualify for this option can often avoid the worst fines and penalties, though of course the help of a knowledgeable professional can be a powerful asset when protecting your finances. To learn more about U.S. Tax Help and how we can work for you, visit us online or call (541) 362-9127 right away to set up your first consultation.
