Expat Unfiled Tax Returns
Expat unfiled tax returns are very hard to explain away to a federal or state tax authority. While a common mishap, claiming ignorance is balanced by the issue of willfulness which the IRS will raise if you show, through previous filings, that you understood that the US taxes its citizens and permanent residents on worldwide income rather than just money earned stateside. Have you ever filed a US tax return in your entire life? Have you ever filed a US tax return while living or working overseas?
But I didn’t know…
If you have ever filed a return in the past, the IRS can say your failure to file in recent years is a “willful” act; you “decided” to skip a year… or two… or three. Ignorance or forgetfulness is not acceptable excuses. Naturally your foreign employer didn’t send you a US Form W2 or Form 1099 and you didn’t know what to do. Nevertheless, you still have to report the income. Not filing a US Tax return while living abroad is common but nevertheless a bigger issue. It is to your advantage to file a tax return especially if you are living or working overseas because you may benefit from the Foreign Earned Income Exclusion and other valuable credits, but only if claimed before the IRS takes action to obtain your expat unfiled tax returns.
What Are The Penalties For Expat Unfiled Tax Returns?
There are penalties for a failure to file a tax return by the due date.
- Failure to File Penalty: 5% of unpaid balance for each month or part of a month the return is late. Maximum 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $135 or tax due. There is no penalty if the return shows a refund.
- Failure to Pay Penalty: 0.5% of unpaid balance for each month or part of a month there is an unpaid balance. Maximum 25%.
If your only issue is non-compliance (i.e. expat unfiled tax returns) you are at least just looking at an administrative issue and you will be back on their good side in no time by filing your late returns. Don’t deal with the IRS about this issue on your own. Contact an experienced tax practitioner like Tax Samaritan to get your financial affairs back in order.
Tax Preparation Fees
Tax preparation fees can be expensive. Unfortunately the United States Tax Code is complicated even if you live and work in the States. If you are living overseas, you are wise to pay someone to prepare your income tax returns as the code is exponentially more complicated. US Expats have unique tax issues that need to be understood. An experienced tax practitioner has a thorough understanding of the nuances of the tax law that apply to overseas taxpayers so that your tax liability can be minimized to the fullest extent allowable according to tax law. Regardless of whether you are missing records, fear the possibility of owing money, or are afraid to deal directly with IRS, you still need to file your expat unfilled tax returns as soon as possible.
Why sooner than later? Why You Should File Your Expat Unfiled Tax Returns Sooner
You should act sooner than later. You need to submit expat unfiled tax returns as soon as possible because the IRS Statute of Limitations is ticking away. While not filing is a criminal offense, not paying your taxes is just a civil offense. Don’t let the fear of a tax bill stop you from complying with your filing requirements.
If you have unfiled expat tax returns, usually you will have to file the previous six (6) years, plus the current year. Depending on what years the IRS will request, this “fix” may satisfy the IRS. We usually wait for any request before we prepare returns going back further then six (6) years. While this is common IRS practice, the tax code and Statute of Limitations (discussed further below) leaves you open for additional unfiled tax years. Sometimes it taxes several years before the IRS notifies you that you did not file your return. This is not the situation you want. After several years pass, you may have lost vital records, and have forgotten much about your financial situation. The interest and penalties for filing and paying late may be insurmountable!
IRS Statute of Limitations
Here are the issues you need to consider as it relates to the statute of limitations and expat unfiled tax returns. The statute of limitations refers to how long the IRS has to inquire about your tax return, audit you, charge taxes, penalties and interest, etc. Generally, there is a 3-year statute of limitations for the IRS auditing a tax return and a 10-year statute of limitations for the IRS collecting tax.
If you under report your gross income by 25% or more of the amount shown on your return, then the statute of limitation is six (6) years. The statute of limitations does not apply if you file a fraudulent return with the intention to evade taxes (i.e. they can come after you indefinitely) or if your tax return was prepared by the IRS (i.e. a substitute filed return).
Some US Expats have spent a good amount of time researching their situation and have found that the statute of limitations for collection expires in 10 years – that is, the IRS cannot collect and it become bad debt after 10 years. A taxpayer could enter into payment agreements and at the end of 10 years, regardless of the balance left, owe the IRS nothing.
While this sounds great, don’t get too excited. According to IRS Code Section 6503(c), “Taxpayer Outside United States”, the running of the period of limitations on collection after assessment prescribed in section 6502 shall be suspended for the period during which the taxpayer is outside the United States if such period of absence is for a continuous period of at least 6 months.
Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions for you to get caught up with your expat unfiled tax returns.
If you would like a quote, please click on the button below for a free, no obligation Tax Preparation quote and/or free 30-minute consultation to discuss your situation regarding your expat unfiled tax returns further:
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in the preparation of expat unfiled tax returns, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.