As a citizen of the United States, whether you live within the domestic confines, or live abroad, you are subject to the same U.S. tax laws and regulations; moving out of the country does not exempt you from these obligations.
Due to mounting debt, and an economy that hasn’t quite recovered from the financial crisis, the U.S. federal government passed the Foreign Account Tax Compliance Act (FATCA) in 2010. This law requires foreign banks to report all assets and identities of U.S. born individuals to the U.S. Department of Treasury. With Intergovernmental Agreements (IGAs) with over 100 countries all over the world, the IRS regularly goes through data from foreign countries, to ensure that expats are complying with U.S. tax law.
With that being said, expats should be extra careful making sure they are filing their returns properly because they risk not only fines & penalties, but also criminal charges, and even revocation of their U.S. passport. That’s right; as an ex-pat, if you do not properly file and report your earnings, you could be barred from coming back into the United States.
Here are the 3 most common mistakes expats make with their taxes
1. Failure to file a U.S. return
One of the most common mistakes ex-pats make is believing that they no longer have to file a U.S. tax return after moving abroad. This couldn’t be any further from the truth. Not only are ex-pats required to file a return, but they may be penalized and charged interest for both failure to file, and failure to remit any federal tax due. These fees can add up the tens and for higher net worth individuals, even the hundreds of thousands.
2. Fear of IRS Retribution
Many ex-pats do not file a tax return because they have not done so for years. They mistakenly believe that they will be heavily fined and penalized by the IRS in their first filing. In recent years, the IRS has taken certain positions that suggest they are more concerned with taxpayer compliance, rather than punishing them for noncompliance. In other words, the IRS would rather have delinquent filers come forward without fear of punishment, instead of imposing hefty fines. As long as taxpayers are non-willfully delinquent, they can avoid penalties under the IRS’s Streamlined Procedures program. Participating taxpayers are only required to file their prior 3 years of tax returns and 6 years of the FBAR form (described in more detail below). Contact your CPA to learn more about the Streamlined Filing Compliance Procedures.
3. Failure to report Assets
If the total value of all of your foreign bank accounts is greater than $10,000 USD, at any point during the year or at the end of the of the year, you are required to file the Report of Foreign Bank And Financial Accounts (or FBAR for short) to the U.S. Federal government. Willful failure to file this report can result in a penalty of the greater of $100,000 or 50% of the unreported aggregate balance in the foreign bank accounts.
So how do you avoid these mistakes?
1. ORGANIZE YOUR FINANCES
Whether you live in the U.S., or abroad, a good rule of thumb is to set aside space at home for anything and everything related to your earnings, expenses, assets, and liabilities. When tax season comes around, all you have to worry about is handing over these files to your trusted CPA.
2. FIND A GOOD CPA
Finding a knowledgeable and experienced Certified Public Accountant (CPA) firm you can trust is probably the most important thing you do in managing your finances as an ex-pat. For example, a good CPA will help prevent your earnings from being taxed by both the U.S. and your country of residence; as an expat, you need a CPA that is well versed in all U.S. tax code provisions to reduce or completely eliminate your U.S. tax liabilities. There are also specific forms that must be filed properly in order to receive the FEIE or the foreign tax credit.
Having a good CPA by your side will not only help you avoid the stress and headaches from dealing with the IRS, but also time and money.
3. PLAN FOR THE FUTURE
“If you fail to plan, you are planning to fail”
– Benjamin Franklin
Living and working abroad can have a big impact on your U.S. tax liabilities. Whether you’re planning on staying abroad for the short or long term, it’s best to plan out major financial decisions with your CPA, as they are probably your best source for sound financial advice. A good CPA will be able to give you good advice on managing your assets and your liabilities. Expats should regularly contact their CPA regarding major financial decisions such as purchasing foreign real estate, managing a foreign retirement account, and taking advantage of fluctuations in the currency markets.