Some of the things Americans dread the most are spring cleaning, holidays (because of the extra spending and financial burden), and tax filing.
People have always viewed tax filing as difficult. In fact, there are articles published as early as 1999 that talk about the same thing. People who live and work in America find filing taxes already tricky enough, so what more for U.S. expats? They probably dread tax day more than anyone, for the complicated task is on another level—with new sets of guidelines and rules.
Even though they earn in a foreign country, expatriates must still file their taxes in the U.S. While the government already provides the information taxpayers need to prepare their return, U.S. expat taxes can be complex. Let’s look at some of the reasons why filing taxes are so complicated for them.
Reason #1: Heavy-handed regulations aim to prevent tax evasion and loopholes.
In the past, there have been cases of wealthy Americans hiding their assets overseas to conceal untaxed cash from the Internal Revenue Service (IRS), whether through false federal tax returns or depending on Swiss bank secrecy.
For instance, HSBC’s Swiss branch admitted to tax evasion, filing false federal tax returns and defrauding the United States between 2000 and 2010 to hide massive amounts of money for rich Americans.
Such cases made filing tax returns for law-abiding, tax-paying Americans a tad harder. The IRS makes it clear that U.S. expats and anyone who has significant links to the U.S. (i.e., people who’ve never lived in the U.S. but were born to American parents overseas) must file U.S. taxes and disclose their foreign assets.
Additionally, there’s a law in the United States that tries to prevent tax evasion using offshore accounts called the Foreign Account Tax Compliance Act (FATCA).
Reason #2: Amounts need to be converted from local currencies to U.S. dollars.
Dealing with numbers is hard enough when filing taxes. Imagine sorting them out in a different local currency and converting them into U.S. dollars. You’ll have to sift through the tedious and time-consuming process of searching for the exchange rates on specific days or through the IRS’s currency conversion chart to translate the foreign currency into U.S. dollars for your tax return.
You can visit IRS’s yearly average currency exchange rates to learn more about this.
Reason #3: The forms are penalty-sensitive, and the fines for unintentional errors come at a high price.
The Internal Revenue Service can slap you with a hefty penalty of about $10,000 annually for undisclosed foreign accounts, regardless if they generate any taxable income in the U.S. or not.
Moreover, if you’re aware of your tax obligations but chose not to file for whatever reason, then that’s considered a willful violation. However, not knowing about them, hence, failure to fulfill the obligations, is regarded as a non-willful violation. The latter comes with lower penalties as long as the IRS agrees.
On the bright side, if you accidentally made any mistakes, you can file Form 1040X to amend the errors within three years of the original due date. However, you are required to present an explanation detailing your reason for filing an amended tax return.
If you happen to report additional income after a significant amount of time since filing your original return, further penalties and interest may be imposed.
Reason #4: Expat tax filing is more than just presenting your income and claiming your tax benefits. You also need to report all your foreign assets correctly.
Innocent mistakes or inactions can get you in trouble with the IRS. Here are some of the common things expats do while living or working overseas that could cause problems with the IRS. Participating in such things will require you to file various “informational disclosure” forms. If you don’t file the necessary forms, you’ll face expensive penalties.
- Investing in a personal retirement plan outside America
- Failure to properly report employer or personal pensions or life insurance
- Investing in real estate through a trust or entity
- Formation of separate legal foreign entity to conduct business or for personal reasons
- Purchase of foreign corporation stock (10% or more in ownership)
- Making employee contributions to a foreign employer’s pension plan
Reason #5: You also need to deal with (and be aware of) a lot of forms and publications.
Tax day is every April 15. Those who reside abroad can receive an automatic extension to June 15. Those with signature authority over a foreign account with an aggregate value of the overseas account exceeding $10,000 any time with the year are required to submit the Foreign Bank and Financial Accounts (FBAR), typically due every April 15 as well. The IRS has historically granted an automatic extension to October 15 to file the FBAR for those who miss the April 15 due date.
You have to note the dates, forms, and requirements you must submit as an expat to ensure you don’t miss anything and you’re fully compliant.
Wrapping It Up
Failure to file your taxes as a U.S. citizen working or living abroad can result in serious consequences, including losing your passport, paying hefty fines, and jail time for serious tax evaders.
Tax obligations for U.S. expats are a complicated duty, but you don’t have to take on the task by yourself. You can always get expert and competent tax advice from tax preparation services like Tax Samaritan. With our help, you can make the best out of your international employment.