Explanation of US Expat Taxes When Filing Late by One or Multiple Years
By I.J. Zemelman, EA,
How Severe is the Problem?
When it comes to the truth about filing overseas tax returns, expatriates are generally confused and somewhat misled about when to file, how to file, and even whether or not to file at all. The reality is that the United States imposes the burden of tax filing on all of its citizens and Green Card holders regardless of whether they live in the US or elsewhere on the globe. For this very reason, quite a few expatriates wind up in a position of non-compliance – either by filing late or failing to file altogether. In this article, we will discuss how to become current if you’ve fallen behind on filing your United States expatriate taxes.
The first thing you should know is that you probably aren’t at high risk for severe penalty (if any at all) from the IRS for having filed your expat taxes late. The IRS is fully aware of the complications and confusions expatriates face when it comes to filing taxes and is generally very lenient on those who maintain healthy communication about the status of their taxes and have every intention of becoming compliant.
The most likely scenario for your being assessed penalties by the IRSis for that of having had a balance due on your US expat taxes which were filed late. If you owe the IRS and fail to file your taxes by the deadline, you may be subject to 3 different penalties:
· Non-Filing of US Expat Taxes – Expatriates who reside and work in a country besides the US are given until June 15th to have their taxes filed. Even though the deadline to file may be extended as far as October 15th, the deadline to pay any taxes due remains June 15th. If you fail to file or formally request an extension from the IRS before the June 15th due date you may be charged a 5% fee for every month you fail to file. This penalty is not to exceed 25% and its calculations are based on the total amount you owe the IRS as reported on your US expat taxes.
· Non–Payment of US Expat Taxes – The non-payment of US expat taxes penalty is charged at 0.5% of the total amount you owe the IRS on a monthly basis until you pay – there is no maximum penalty amount.
· Interest Charged to Your Tax Liability – The rate of interest charged to your balance due to the IRS changes quarterly – fluctuating with the market. The current rate of interest assessed to US expat taxes is 4%, and this rate is assessed and applied to the balance every day it goes unpaid. Like the penalty for non-payment of US expat taxes, there is no maximum.
The aforementioned penalties and interest charges are only applicable to expatriates who have a balance due on their taxes. If you are entitled to a refund from the IRS you will not be charged penalties or interest for filing late. If you want to receive the refund you have coming to you, however, you will be required to file within 3 years of the original date your taxes for that year were due. If you owe a balance to the IRS they may utilize a number of means to collect the balance from you for as long as 10 years.
If the IRS has knowledge of your reported income and you have failed to file your expat taxes, it is likely that a substitute return may be filed automatically based on the information they have and without making any allowances for exemptions or deductions. This means that even if you would have filed and received a return the IRS is assuming that you would have owed, and at that point they will begin their collection process. The best way to avoid this type of situation is to make sure to file your US expat taxes as soon as possible. If this has already happened, you can help yourself tremendously by filing a return immediately so the amount you owe can be lessened or eradicated altogether.
If some time has elapsed since the last time you filed your taxes, getting caught up can prove to be quite a tedious task. The first thing you need to figure out is the number of years for which you need to file back taxes. There are different schools of thought about how many years of filing back taxes is necessary, and each individual’s circumstances are unique. It will be important for you to consider all aspects of your US expat taxes and come up with a solution of becoming tax-compliant which best suits your needs.
As indicated earlier, refunds from the IRS will only be issued if taxes are filed within 3 years of the original due date – which is very strict. For example, the due date for 2009 taxes was April 14th of 2010. If you file your 2009 back taxes before April 14th of 2013 you will be entitled to receive a full refund. If you wait until April 16th to file, however, you will no longer be eligible to receive your refund. Because of this fact, if you’re in a position where you haven’t filed your taxes in a number of years and you have reason to believe you have a refund due, most tax professionals suggest that you file US expat tax returns for the previous 3 years to become tax-compliant.
There is another side to the coin, however; it’s important for you to understand that the IRS retains tax information in its records for up to 6 years. If you had not filed taxes for a period longer than 3 years and you feel like you would have been issued a refund beyond the 3 year mark, it may behoove you to file your returns – even though you won’t get a return. Why? Because there is no statute of limitations governing the length of time required for the IRS to take collective action. If they filed a substitute return for you and determined that you owe taxes they may be able to garnish your wages at some point in the distant future.
According to the IRS tax code, all US expatriates are required to file an income tax return for all years in which he/she earned any amount over the filing threshold for that specific year. In accordance with the tax code, the IRS can attempt to collect any tax debt for a period of 10 years beyond the original due date.
Now that you have more information about the various angles, the question remains: For how many years should I file? Answering this question can prove to be quite difficult, but there are a couple steps you can take to help you determine the best course of action. You may be wise to speak directly with an IRS representative to get an idea of what they require and how far back they’re looking. An IRS representative will be able to give you a complete overview of your tax situation as far as the IRS is concerned and whether or not they’ve decided you have an outstanding tax debt from previous years. A good rule of thumb, however, is:
· If you don’t owe money – If you file for the previous six years you should be free of all future tax liability issues.
· If you owe money – File for as many years as the IRS says that you owe…It will only get worse if you don’t.
Upon having made the decision to become current on your back taxes, the next task is to compile the necessary documentation. Depending on how many years you’re going back, this can be quite a big job. Fortunately, the IRS retains all records on every taxpayer for 6 years, and anybody can request their tax information from the IRS by submitting Form 4506-T. Information obtained in this way can take up to 45 days to reach the taxpayer, and – although there may be a quicker method of receiving the information – this is the best way to get all the information you will need to file both your federal and state returns (if applicable).
A faster option of receiving your tax information from the IRS is to contract a tax professional to request the information from the IRS via an electronic system. This information, however, is only a way to get information directly relevant to your federal US expatriate tax return.
Additionally, it is quite likely that you will not get information about your total foreign income or overseas bank accounts from either of these methods – as this information is not always reported to the IRS by the originating agencies. If you need to acquire information such as this that either wasn’t reported to the IRS or goes farther back than the 6 year threshold you will need to get a bit more creative in your documentation compilation process.
Perhaps you have an old shoebox full of previous years’ documents, or you may be able to refer to your old bank statements for income and deductions. You may also be able to contact the agencies which played a role in each aspect of your taxes including previous employers, mortgage lenders, qualifying charities, and even the tax authority of the country in which you lived and worked.
There are a variety of US expat tax circumstances which may require the filing of special forms. Failure to file such forms could result in moderate to stiff penalties, so it will be important for you to have a complete understanding of what was required each year for your specific situation. Here are some of the most common reasons for having to file one of these special forms:
· US citizens involved in a foreign partnership must file Form 8865
· US citizens holding a foreign bank account or multiple foreign bank accounts in which the total combined value exceeded $10K at any time throughout the year must file Form TDF 90-22.1
· US citizens who have transferred assets or money into a foreign corporation must file Form 926
There are many other situations in which you may be required to submit a special form, but these are the most common scenarios for having to file additional forms with your US expat taxes. To ensure you file your US expat tax returns completely with all required forms, make sure to talk to a tax professional to guide you in the right direction.
How are My US Expat Taxes Affected by Self-Employment?
To be self-employed in a country overseas – either as a business owner or as an independent contractor – is to be almost guaranteed that your US expat taxes will be more complicated than if you were a regular employee. Those who are self-employed will be required to pay self-employment (SE) taxes. Although you may be able to offset some of your SE taxes with housing and income exclusions, this will do nothing to minimize the 15.3% SE tax imposed on your earnings. There are, however, some tax treaties in effect which help to minimize your SE tax liability. Nonetheless, penalties and interest assessed on back taxes for self-employed individuals will be much steeper than those for overseas employees.
There may be exceptions for expats who live and work in Australia, Canada, Germany, the UK, and a select few other countries that have clauses in their treaties regarding payment into their social insurance programs. If such a treaty is in effect and you take the steps to pay into your host country’s social insurance program you will not be required to pay SE taxes to the United States on your income. This option requires a sufficient amount of preparation and communication with your host country, and you may be better off discussing your options and the details of each treaty with one of our friendly and qualifiedexpat taxprofessionals.
I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887