American Expat Tax Confessions: 7 Reasons I Did Not File A U.S. Tax Return

The single, most common mistake that U.S. citizens abroad make is to not file a U.S. tax return while they are out of the country. Here are the reasons we've heard over the years.

Please note: the IRS does NOT accept ANY of these reasons for a failure to file.

• "A presenter at a local expat community group told us we do not need to file."
• "I thought that since the Foreign Earned Income Exclusion (for 2009) was $91,400 and we made under $91,400, we did not need to file – that's what 'exclusion' means, right?"
• "I read online that if we do not work in U.S. we do not need to file."
• "My stateside tax preparer said he didn't think I needed to file while abroad because I didn't think I'd be working while I was there."
• "A friend told me that I do not need to file because the U.S. only taxes U.S. income."
• "A co-worker told me when we arrived that since we work for a foreign company, we do not need to file."
• "I checked and learned that I worked in a non-tax jurisdiction. Doesn't that mean that I did not need to file?"

We share this list with you to reiterate: If you're a U.S. citizen or foreign national, you must file a U.S. tax return. You must file a U.S. tax return to elect available tax benefits like the Foreign Earned Income Exclusion (FEIE). You must file a U.S. tax return to start the statute of limitations with respect to IRS audits. You must file a U.S. tax return on WORLDWIDE income – regardless of the foreign jurisdiction. U.S. citizens are taxed on WORLDWIDE income. You must file a U.S. tax return even if your local tax preparer might have told you that you don't have to.

The ONE Exception

There is one exception to the requirement of filing a U.S. tax return: if you do not earn enough income. This income limit is NOT based on the Foreign Earned Income Exclusion ($91,500 for tax year 2010). The breakpoints for this are as follows (From IRS 1040A instructions 2010 page 8)

• If your filing status is SINGLE and at the end of 2010 you were UNDER 65 then file a return if your gross income was at least 9,350.00
• If your filing status is SINGLE and at the end of 2010 you were 65 OR OLDER then file a return if your gross income was at least 10,750.00
• If your filing status is MARRIED FILING JOINT and at the end of 2010 you were UNDER 65 (both spouses) then file a return if your gross income was at least 18,700.00
• If your filing status is MARRIED FILING JOINT and at the end of 2010 you were OVER 65 (one spouse) then file a return if your gross income was at least 19,800.00
• If your filing status is MARRIED FILING JOINT and at the end of 2010 you were OVER 65 (both spouses) then file a return if your gross income was at least 20,900.00
• If your filing status is MARRIED FILING SEPARATELY and at the end of 2010 you were ANY AGE then file a return if your gross income was at least 3,650.00
• If your filing status is HEAD OF HOUSEHOLD and at the end of 2010 you were UNDER 65 then file a return if your gross income was at least 12,050.00
• If your filing status is HEAD OF HOUSEHOLD and at the end of 2010 you were 65 OR OLDER then file a return if your gross income was at least 13,450.00
• If your filing status is QUALIFYING WIDOWER and at the end of 2010 you were UNDER 65 then file a return if your gross income was at least 15,050.00
• If your filing status is QUALIFYING WIDOWER and at the end of 2010 you were 65 OR OLDER then file a return if your gross income was at least 16,150.00

Note the very low thresholds for married filing separately.

An example would be if you live and work in Country X, are single under age 65, and only make $7,000 a year you would be exempt from filing a tax return. Not filing will not cause problems when under the filing breakpoints.

The Exception to the Exception:

There is one exception to the exception: If you have self-employment income over $400, you must file a return. The income thresholds mentioned earlier, do not apply when there is self-employment income involved.

The bottom line is this:

If you have income, you must file a U.S. tax return. Don't risk the additional cost, headaches, anxiety, and even criminal prosecution, associated with not filing a U.S. tax return. Filing your tax return will help you optimize your tax savings and prevent problems with the IRS. Like personal health, prevention is the best medicine when it comes to taxes.

In closing, we make it a practice with our American expatriates to ALWAYS file a U.S. tax return for them while they are abroad. If nothing else, it starts the timeline for the statute of limitations associated with an audit by the IRS. Most people do not want to be audited by the IRS if they can help it. Moreover, if you have a tax professional file your return for you, you will have their professional guidance in the event of an audit. This assurance alone is usually worth the cost of preparing the return.

Each state's filing requirements are different and may or may not follow Federal (IRS) filing guidelines. Be sure to work with a tax professional experienced in expat taxes so that you are properly filing all the tax returns required of you while abroad.