U.S. Expats Abroad: File Sooner Than LaterPart two in CFO2GO's tax filing tips for U.S. Expat residents.
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This article is the second in a series directed at helping American expatriates cope with their personal tax reporting obligation to the IRS. Do Expats need to file taxes in the US? Probably, Yes! Some expats are not aware that they are required to file a tax return each year that their income exceeds the minimum filing requirements (USD 8.200 for a single person in 2005). If your income exceeds this threshold, you are still required to file a tax return - even if all of your foreign earned income can be excluded on form 2555. And if your total foreign earned income exceeds the foreign earned income exclusion limits (USD 80.000 for tax year 2005), it is especially important that you file form 2555 within one year of the due date of your return or as soon as possible. If you have failed to file your return and have not claimed the foreign earned income exclusion on form 2555 (in the last few years) by the filing deadline and the IRS discovers this before you get caught up, the IRS can deny you the exclusion and you may well pay double. There are still other procedures that you can follow to obtain the exclusion in this case, but they are more complicated and only add stress to an unhappy situation. A brief note here for your further research: If you have net income from self employment of more than US 400, you will also owe self-employment tax (SE tax). This is different from the federal income tax. Even if your net earnings are below the foreign earned income thresholds, unless they are negative you will still be obligated to pay the SE Tax. The rules for paying self-employment tax are generally the same whether you are living in the United States or abroad. Penalties and Interest Penalties and interest are charged on taxes not paid by the due date of the return. If you have unfiled tax returns, the sooner you have them prepared, the sooner you will know what if any balance is due. You can then file the returns and protect your right to take the foreign earned income exclusion and have the peace of mind that comes with knowing that your tax situation is up to date. If you can not pay your balances in full you can enter into an installment agreement with the IRS once you have filed the past due returns. However, the interest rates are high and therefore other financing options should be explored. U.S. income tax returns are generally due on April 15 for calendar year taxpayers. If you are a U.S. citizen or resident and both your tax home and your abode are outside the United States on the regular due date, an automatic extension is granted to June 15 for filing the return. Interest is charged on any unpaid tax from April 15 until the date of payment. The interest rate is determined every three months and is the federal short-term rate plus 3 percent. Interest is compounded daily. If you file on time but don't pay all amounts due on time, you'll generally have to pay a late payment penalty of one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25% maximum penalty is applied. The one-half of one percent rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. For individuals, who file by the return due date, the one-half of one percent rate decreases to one-quarter percent for any month in which an installment agreement is in effect. If you owe tax and don't file on time, the total late-filing penalty is usually four and one-half percent of the tax owed for each month, or part of a month, that your return is late up to five months. If your return is over 60 days late, the minimum penalty for late filing is the smaller of $100 or 100 percent of the tax owed. Reasonable Cause The IRS says that penalties (not interest) for filing and paying late may be abated if you have reasonable cause. If you are billed for a penalty and feel you have reasonable cause, send your explanation along with the bill to your service center, or call the IRS at 1-800-829-1040 for assistance. Generally, interest charges may not be abated; they continue to accrue until all assessed tax, penalties, and interest are paid in full. Generally, any reasonable cause exception to the penalty for failure to pay tax cannot be determined until the tax is paid in full. The IRS advises if you were unaware of your obligation to file US tax returns you should file the late returns as soon as possible, stating your reason for filing late. We agree. We find that in addition to limiting their potential liability, expat taxpayers for whom we have done 5,7,8 and even 12 years of back returns also get peace of mind - and that is worth a lot. For advice on filing the returns yourself, you should contact either the Internal Revenue Service representative serving your area or the Internal Revenue official who travels through your area (details can be obtained from your nearest U.S. consulate or Embassy). You can also write to the Internal Revenue Service, International Section, P.O. Box 920, Bensalem, PA 19020-8518. And if that isn't enough, feel free to call or email me. I would be happy to work through the issues and numbers with you. joyce.mohr@cfo2goeurope.com |
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