American Expatriates Face Serious Penalties for Not Filing a US Tax Return

Some Americans residing abroad believe that they should not file since they live in a foreign country and diligently pay foreign income tax. Others think that if they earn below the foreign earned income exclusion, they don't owe any US taxes so they should not file. You probably heard some stories about people who believe that the IRS will never find them. Whatever reason they have, they should be ready for a rude awakening.

Why should an American expat file a US tax return? What will happen if I don't file? At Artio Partners, we receive quite often these questions from our clients. Please find below some common issues to pay attention too:

• Law. Per section 1 of the Internal Revenue Code you have to file if you meet filing requirements. Whether you must file your tax return depends on three factors: gross income, filing status and age.
• Worldwide income taxation. US citizens are taxed on their worldwide income so American expatriates need to file a US tax return even if they pay taxes in a foreign country.
• Foreign earned income exclusion. If you don't file a return, the IRS will do it for you. However, this IRS-prepared basic return will not include foreign earned income exclusion or any other exemptions that you should be eligible for. You should be ready for a tax liability assessed by the IRS as well as interest and penalties.
• IRS Audit. Getting a letter from the IRS is not a pleasant surprise. The IRS has only three years from the date you file to audit your return. However, if you don't file, this statute of limitation will not start until you file.
• Buying a home. In order to apply for a mortgage in the USA nowadays lenders require tax returns from you in addition to requesting transcripts from the IRS.
• Financing a business. You need to show your most recent year tax return to apply for a business loan.
• Application for federal aid to higher education. Do you want to go back to school and apply for financial aid? All universities are required now to collect your federal tax return transcripts instead of federal tax return.
• Green-card holders. If you want to become a US citizen one day, you want to be a resident in good standing. If you have ever failed to file an income tax return since you became a lawful permanent resident, the USCIS will request you to send all correspondence with the IRS regarding your failure to file. Also, a permanent resident can be deported from the USA for filing a false tax return. On February 21, 2012 the U.S. Supreme Court ruled, in a case titled Kawashima v. Holder, that filing a false tax return is a deportable offense.
• US passport. The Senate passed the transportation bill with an amendment that would give the State Department the right to deny, limit or revoke passports of taxpayers with a seriously delinquent tax debt in an amount in excess of $50,000.
• IRS Penalties. If you owe tax then you will end up paying a penalty on the amount you owe at 5% per month. However, if you file, per the statute of limitations the IRS cannot collect the tax or penalties after ten years from the date you filed a return.
• FBAR civil and criminal penalties. If you willfully failed to file FBAR or retain records of account, you can face civil penalties up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Also criminal penalties in the amount of up to $250,000 or 5 years or both may be imposed.

The good news is that most American expatriates don't owe any US taxes after they file a tax return. If you have any questions or need help with filing taxes, please use a tax professional who specializes in US tax preparation for Americans living abroad.

This article is for informational purposes only. Please consult your tax advisor regarding your individual situation.