If you are an American national trying to figure out how to file your US taxes, chances are that you might stumble onto ‘pain points’ or challenges. Here are a few of the most common pain points that US expats typically face in the tax filing process:
Unfiled income tax returns
This is the most common issue that US expats run into when it comes to filing their taxes. Just because you are a US citizen living abroad, this does not exempt you from having to file a tax return in your home country. Your worldwide income will be subject to US taxation, regardless of where you reside. If you haven’t filed in a number of years, you’ll want to have a chance to file your returns while avoiding penalties. In this scenario, you may be eligible for the Streamlined Filing Compliance Procedures. This program is available to taxpayers who are able to certify that their failure to report all of their foreign financial assets and file timely tax returns was not because of willful conduct on their part.
Failure to report ownership in foreign financial accounts
US expats that fail to report their ownership in foreign financial accounts can be subject to stiff financial penalties levied on them by the IRS. In 2010, Congress passed what is known as FATCA, or the Foreign Account Tax Compliance Act. This law requires foreign financial institutions to report their American account holders to the IRS if they are requested to do so, and this includes the bank balances of those American account holders. Foreign financial institutions that trade in the US financial system will face fines if they do not comply. What does this mean to taxpayers? For instance, the IRS can impose a USD10,000 penalty on you if you fail to file what is called Form 8938 by the due date of the tax return (including extensions) or if you file an incomplete or inaccurate Form 8938. In addition, the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury can levy penalties of up to USD10,000 per bank account per year for each year that a timely Form FinCEN 114 (also known as the FBAR) is not filed.
Lack of adequate representation while overseas
This is also a common problem for US expats, mainly because of the complexity of US expat taxes and the added issue of time-zone differences between the US and other countries. Working with a good expatriate tax professional is a great way for you to complete all of the required forms. However, you may be unlucky enough to have your tax return examined by the IRS. If this happens, do you have someone you can trust to help you navigate these dangerous waters? This is the reason why having someone on your team who both understands the challenges expats face and can represent you should you be audited is so important.
The IRS has in its arsenal many ways to find out about American expats’ tax filing history, what bank and or investment accounts they may have, how much money is in these accounts and where these people live. In addition, the US now also has tax information exchange agreements with many foreign governments, so just by looking at your foreign bank accounts, or your foreign tax return, the IRS could find out whether you should be filing a US tax return. Therefore, it behooves you to take the steps necessary to file your tax return(s) and report your foreign bank balances even when living overseas. If you need assistance with filing your US tax return, it is suggested that you consult with an experienced expat tax professional.
For inquiries, please reach out to tax@olivar-greb.com.
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