If you are one of the millions of U.S. citizens who are behind on tax filings, it’s time to take action!
Whether you didn’t realize you had a filing obligation or have admittedly procrastinated a bit too long, rest assured that it is not too late to get back on track. There is a host of misinformation out there so we are here to debunk the top 5 myths of US tax compliance.
Myth #1: I don’t have to file US taxes if I live abroad.
The US is one of the few countries who employs citizen-based taxation, so no matter where you live, you must file a US tax return if you meet the minimum thresholds. Those thresholds are really low (i.e. $10,000 for single taxpayers and $400 for self-employed individuals) so you likely need to file. Of course, filing a return isn’t always a bad thing—expats are often surprised to actually receive a refund!
Myth #2: I will have to pay taxes.
This is one of the most surprising myths to expats, but the truth is, most expats don’t owe a dime to the US when they file. The US has put deductions, exclusions and credits in place to help prevent dual-taxation—the most popular of which is the Foreign Earned Income Exclusion. With this, you can exclude up to $100,800 of foreign income from US taxation when you qualify via one of two residency tests. Most expats qualify via the Physical Presence test, which requires you to be inside a foreign country for 330 of any 365-day period. Other credits, such as the Foreign Tax Credit, don’t require you to qualify so they are available to everyone.
Myth #3: I’ll be forced to pay major penalties.
A couple of years ago, this may have been true. But today, it’s a myth! The IRS has modified its amnesty program, the Streamlined Offshore Filing Procedures, to eliminate late filing and FBAR (Foreign Bank Account Report) penalties. Previously this program had several restrictions that prevented many expats from qualifying and penalties were steep. But with the changes last year, the barriers to eligibility have been removed. At last, you can get caught up without worrying about financial ramifications!
Under the Streamlined Offshore Filing Procedures, you simply file the past three years’ tax returns and last six years’ FBARs and you won’t pay any penalties. Of course, you must certify that your lack of filing was non-willful—meaning, you weren’t purposely trying to hide your assets from the IRS.
Myth #4: The IRS can’t find me because I live abroad.
Ever heard of the long arm of the law? Well the IRS has an arm just that long and they are actively (and aggressively) pursuing tax dodgers. The most well-known part of this effort is FATCA, the Foreign Account Tax Compliance Act, which is making global (and controversial) headlines. Under FATCA, US taxpayers are required to report the value of foreign financial assets if they exceed certain thresholds (which vary based on filing status and residency).
The controversial piece of FATCA is that foreign financial institutions are now required to report on the assets of their American clients. What does this mean for you? Basically, if the IRS chooses to investigate you, your banking activities overseas will be an open book. Any and all activities are subject to interpretation and if they decide you aren’t being honest, you are ineligible for any IRS amnesty program and you will be at their mercy. And no one wants that!
Myth #5: I’ll just renounce my citizenship and be done with taxes!
Not so fast. Giving up your citizenship may eliminate your US tax responsibilities in the long run, but in the immediate future, you are not off the hook.
When you begin the process to renounce your citizenship, you must file Form 8843, which certifies that you have been compliant on your US tax filings for the past 5 years. So before the renunciation can be approved, you’ll need to file your delinquent returns under the Streamlined Offshore Filing Procedures. While this program only requires you to file the last three years’ returns, the IRS will accept that as your good faith effort to become fully compliant and your request will be granted (once you pay the hefty $2,350 fee!).
While the bad news is that you must become compliant, the good news is that it’s far less expensive than you may think! You can choose to file your returns and FBARs on your own but even if you choose to work with a tax professional, the costs are not outrageous, either. The best thing you can do is arm yourself with information. Speak with a qualified expat tax professional to assess your situation and then make the best decision for you. Whatever you decide, we encourage you to get caught up now, as the IRS has not announced an end date for the Streamlined Offshore Filing Procedures so the waiving of penalties could disappear at any time!
[quote_box_center]This post was written by David McKeegan, Co-Founder of Greenback Expat Tax Services. Greenback specializes in the expert preparation of US expat taxes for Americans living abroad. If you would like help getting caught up on your US tax returns, please contact us today or click here to get started![/quote_box_center]
