Expat Unfiled Tax Returns: Helpful Tips for Expats
Falling behind on your U.S. tax returns while living abroad is more common than you think. Every year, many Americans overseas discover they missed a filing requirement, misunderstood tax rules, or simply assumed they didn’t need to file.
Unfortunately, ignorance of the law is not a valid excuse for an unfiled tax return for an expat, and the IRS will not accept any excuses (well, they will listen to some excuses, but not knowing the law is not one of them).
If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S. This is true whether or not you receive a Form W-2, Wage and Tax Statement, a Form 1099, the foreign equivalents, or receive nothing. Additionally, if you are a U.S. citizen or resident alien, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the U.S. or abroad.
When Foreign Income Exceeds the Exclusion
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.
However, if your wages abroad were in excess of the foreign earned income exclusion, or if you have other sources of income which put you in a taxable income situation, then you have the issue of not only having to pay back taxes but also penalties and interest.
Consequences of Unfiled Tax Returns For Expats
There are penalties for a failure to file a tax return by the due date.
1. Late Penalties and Interest
When you fall behind on your tax filings, the IRS adds penalties quickly. The Failure to File Penalty is the steepest. It’s 5% of your unpaid tax for each month your return is late, up to a maximum of 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $135 or the tax due. There is no penalty if the return shows a refund.
If you filed on time but didn’t pay, the IRS assesses the Failure to Pay Penalty. This one is lower at 0.5% per month, but it also continues until the balance is paid or reaches its own 25% cap. Filing an extension can help you avoid the failure to file penalty, but it does not delay the payment deadline. Any unpaid balance still triggers the monthly Failure to Pay Penalty.
On top of both penalties, the IRS charges interest on your outstanding tax liability. Interest compounds daily and varies each quarter based on federal rates. Over time, the combination of penalties and interest can make a manageable balance much larger.
2. Delayed or Forfeited Refunds
Filing late doesn’t only trigger penalties, it can also affect your refund. When the IRS receives a return past the deadline, it may review the account more closely, which can slow down the release of any refund you’re owed. If penalties apply, they may reduce the amount you expected to receive.
There’s also a firm deadline for claiming past refunds. You have three years from the original due date to file and secure any money owed to you. After that window closes, the refund is forfeited permanently. In short, filing late can delay your refund, and waiting too long can cause you to lose it entirely.
3. Missed Opportunity to Use the Foreign Tax Credit
If you paid income tax to a foreign government, you may be able to claim the Foreign Tax Credit to reduce your U.S. tax. But the credit can only be claimed on a filed return. When returns go unfiled, the IRS won’t apply the credit on your behalf, and your tax will be calculated without it. That often means a higher balance than if you had filed on time and claimed the credit properly.
4. Additional Costs to Get Caught Up
Preparing late filings also comes with an additional cost. Because expat tax rules are more complex than domestic filings, most taxpayers need professional help to get caught up. While this is an expense, a knowledgeable preparer can usually identify credits and exclusions that lower your overall liability. In many cases, the tax savings outweigh the cost of preparation. Even if your records are incomplete or you’re uncertain about what you owe, filing correctly is still the most effective way to put the issue behind you.
Tax Preparation Fees
Tax preparation fees can be expensive. Unfortunately, the U.S. tax code is complex even for those who live and work in the U.S. If you are living overseas, you are wise to pay someone to prepare your income tax returns as the code is exponentially more complicated. U.S. expats face unique tax issues that require understanding. 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.
IRS Statute of Limitations
Of pressing importance, though, if you have unfiled tax returns, you need to file them as soon as possible. Not filing is a criminal offense (although unlikely unless the IRS can prove that there was a “willingness” to not file), and not paying your taxes is just a civil offense. So don’t let the fear of a tax bill stop you from complying with your duty. At a minimum, you will want to file your unfiled tax returns to reduce the risk of any criminal offense.
If you have unfiled tax returns, usually you will have to file the previous six (6) years, plus the current year. Beyond that, you may be off the hook, depending on the years the IRS requests. We typically wait for a request before preparing returns dating back more than six (6) years.
While this is a common IRS practice, the tax code and statute of limitations leave you vulnerable to additional unfiled tax years. Sometimes it takes 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!
How the Statute of Limitations Works for Expats
The statute of limitations determines how long the IRS can audit a return or collect tax. Once a return is filed, the IRS generally has three years to audit it and ten years to collect any assessed balance. If income is understated by 25% or more, the audit period extends to six years. There is no statute of limitations for a fraudulent return or a return that was never filed.
Some taxpayers assume the ten-year collection period works in their favor. However, the rules change for Americans living abroad. Under Section 6503(c), the ten-year collection clock is suspended while a taxpayer is outside the United States for six months or more. For many expats, this means the IRS has significantly more time, often unlimited time, to pursue collection.
Because of these rules, unfiled returns keep you open to IRS action indefinitely. Filing the missing returns starts the statute running and helps protect you from future assessments. If you are living abroad and have late or unfiled tax returns, it is best to consult with a tax professional well-versed in the tax rules for Americans overseas and in preparing your unfiled tax returns as quickly and pain-free as possible.
How to Resolve Unfiled Tax Returns
Once you fall behind on your filings, the situation doesn’t improve on its own. The sooner you address the missing years, the easier it is to limit penalties, reconstruct records, and reduce the risk of further IRS action. Here’s how most expats get back into compliance.
1. Gather Your Records
Start by collecting the income and account information needed for each year you missed. If you’ve lost documents or no longer have access to past records, a tax professional can often retrieve transcripts directly from the IRS or help you reconstruct the information. Missing W-2s, 1099s, or foreign income statements are common, and there are established ways to replace them.
2. Review Your Filing Position
With the available records in hand, the next step is to estimate your overall filing position. Many taxpayers delay filing because they worry about a potential balance due, but those assumptions are often incorrect. A large share of late returns actually result in refunds or smaller balances than expected once credits and exclusions are applied. Running the numbers gives you a clearer picture before the returns are filed.
3. Work With an Experienced Professional
Unfiled returns can involve multiple years, foreign income rules, and IRS programs designed for late filers. Having a professional who understands expat tax laws makes the process more efficient and reduces the chance of errors that could trigger further review. A qualified preparer can help reconstruct missing information, identify the credits and exclusions available to you, and determine the best way to present the returns to the IRS.
Filing your past-due returns as soon as possible is the most effective way to stop penalties from growing and regain control of your tax situation. With the right guidance, resolving unfiled tax returns is manageable, and most expats feel immediate relief once the process is underway.
Frequently Asked Questions About Unfiled Tax Returns for U.S. Expats
1. Do I need to file U.S. tax returns if I didn’t owe any tax?
Yes. Filing requirements depend on your income level, not whether you owe tax. Even if exclusions or credits reduce your tax to zero, you still must file to claim them. Unfiled returns keep the IRS statute of limitations open indefinitely.
2. How many years of back taxes does the IRS usually require?
In most cases, the IRS asks for the most recent six years of unfiled tax returns. This is an administrative practice, not a legal limit, and the IRS can request additional years if needed. Filing those six years usually brings you back into compliance.
3. Can I still claim the Foreign Earned Income Exclusion on late returns?
Yes, the Foreign Earned Income Exclusion can generally be claimed on late-filed returns if you qualify. However, you must file a complete and accurate return to claim it. The exclusion does not apply automatically and cannot be used if you never file.
4. What happens if I’m owed refunds on unfiled returns?
You can only claim a refund if you file within three years of the original due date. Once that window closes, the refund is permanently lost. Filing sooner protects any refunds you may still be eligible for.
5. Does living abroad protect me from IRS collection?
No. Living outside the United States does not stop the IRS from assessing tax or pursuing collection. In fact, for expats, the IRS collection statute is often suspended while you live abroad, giving them more time to act.
6. Should I wait for the IRS to contact me before filing?
Waiting usually makes the situation worse. Penalties and interest continue to grow, and missing records become harder to recover over time. Voluntarily filing puts you in a stronger position and gives you more control over how the issue is resolved.
Get Expert U.S. Tax Preparation Wherever You Live
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 clients’ unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.
We understand that the weight of having unfiled tax returns can be a very emotional and trying experience. If you’ve been out of compliance for some time, the tax experts at Tax Samaritan will use all of their knowledge and tools at their disposal to get you back into compliance and to make the process as painless as possible.
If you would like a quote, please click this link for a free, no-obligation Tax Preparation quote and/or a free 30-minute consultation to discuss your expat unfiled tax returns further.
