U.S. Expats Abroad: File Sooner Than Later
Part two in CFO2GO's tax filing tips for U.S. Expat residents.
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.
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
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. firstname.lastname@example.org
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