Once a U.S. citizen or green card holder leaves U.S. soil, they must still file taxes with the U.S. government, however, even if no tax is due. This article will explain how one can be in good standing with the IRS after a one or many years of non-compliance.
First of all, don’t panic. Harsh penalties are normally reserved for those who attempt to hide from and deceive the IRS. Being upfront and compliant will, under most circumstances, grant you an instant favor.
There are three different types of penalties that may apply for failure to file. swiss replica watches
Failure to File US Expat Taxes: As an expatriate who is living and working overseas, the US gives you until June 15th to file your expat tax return. If you are not able to file by June 15th, you may extend your filing deadline until October 15th. You may only extend your filing date, however, not the date your taxes are due. Failure to file or extend the deadline will result in a penalty, 5% assessed, to each month that you do not file (this penalty maxes out at 25%).
Failure to Pay Penalties: If, after failing to file or extend your deadline and receiving a 5-25% penalty, you fail to pay that penalty, you will receive an additional penalty (.5% of the total tax due) for each month that you fail to pay. There is no cap on this penalty.Assessment of Interest: The interest applied to your overdue taxes is not consistent. Actually, it varies every three months according to market activity. There is no cap on the interest that can accrue on back taxes.
If you are owed a refund, you will not owe interest and none of the above penalties will apply to you. The catch is that you only have three years to file and claim back refunds on your expat taxes. Contrarily, the IRS has ten years to chase down and collect owed taxes from expats.
If the IRS finds you (which they always do eventually) before you file, they are permitted to file for you. This is referred to as a Substitute for Return, and it will not be drawn in your favor. None of the exemptions or deductions for which you qualify will be applied, and taxes will be assessed based on your income alone. After the Substitute for Return has been filed, the IRS will formally seek to collect on back taxes and penalties. To avoid the pitfalls that coincide with a Substitute for Return, race to file your own return as quickly as you can.
The number of years for which you should file varies depending on your situation. The following should be considered:
- You can only claim a refund back three years from the return’s actual due date (one day over and you will have missed the deadline). If, to the best of your knowledge, you would have received a refund in all of the years you failed to file, most accountants will recommend only filing back three years. After doing so, you can consider yourself compliant.
- The IRS has the past six years’ information at their fingertips. Some accountants will suggest that, because of this, you file back six years. It is unlikely, whether you would have owed money or been owed a refund, that the IRS will pursue your case back any farther, but be sure to check with a qualified accountant who can help with your decision in this matter. Although the IRS only maintains information on the past six years, there isn’t a statute of limitations on unfiled expat taxes. So under certain situations, you may want to file back even farther.
- The IRS tax code states that you must file an expat return for every year in which you have earned any amount over that years’ threshold. If you are self-employed, you must file if you earned over $400. The IRS is allowed to pursue taxes on these amounts for up to ten years from the return’s original due date. In cases of tax fraud, however, where the expat has willfully deceived the IRS, and under-reported their income by 25% or more, there is no statute of limitations on collection.
As you can see, it is not immediately clear whether you should file back three years, six years, eight years, ten years, or every year that you have been gainfully employed. This is a decision that should be made carefully and with the help and guidance of an international tax expert.
Self-Employment and Expat Taxes
Self employment tends to complicate your US taxes as an expat. If you are self employed, you are required to pay the self-employment tax that your employer would normally pay on your behalf. The Foreign Earned Income Exclusion and the Housing Exclusion both offset your income. They do not, however, cover the currently 15.3% self employment tax that is imposed on your earnings as a self-employed expat. This makes it even more important to remain current in your filing. Interest on back taxes is much higher for you as a self employed US citizen overseas.
The US does have agreements with several countries. These agreements have programs that are very similar to our social security program. By living and working in these countries, you will be paying into their program just as stateside Americans pay into social security. If this is the case for you, and you reside in a country that has an agreement with the US, you are not obligated to pay the standard US self-employment tax! Some of these countries are the UK, Canada, Australia and Germany. Paper work is involved in the process, but if you reside in a country with this very beneficial agreement in place with the US, you can be self-employed without additional tax burden.
The issues of filing back taxes, determining how far back to file and learning the necessary expat tax forms take years upon years to learn. You can trust the international tax experts and Taxes for Expats to conduct the process with knowledge and as much ease and benefit as it possible in your situation.
IJ Zemelman, EA is the founder and tax operations director of Taxes for Expats
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