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US Expat Penalties for Filing Taxes Late and Best Chances of Reducing Them

US Expat Penalties for Filing Taxes Late and Best Chances of Reducing Them

Although there are numerous tax allowances offered to US Expats that are intended to minimize the impact of the United States’ practice on taxation of its residents’ worldwide income, some US Expats wind up not filing a US expat tax return.  In some cases, it’s legitimately due to having no knowledge of this requirement. There are cases, too, in which US Expats learn about high available exclusions like the Foreign Earned Income Exclusion ($97,600 for 2013) and confuse its cap to mean that – as long as they don’t earn that much – they are simply not required to file a tax return; and – of course – there are cases of, “I just keep forgetting,” and, “I’m not paying taxes for a country in which I’m no longer living!”

Whatever the reason for having accumulated one or more years of back taxes or looking back on years in which you were ‘supposed to but never filed’ an FBAR (also referred to as Form TD F 90-22.1), the reality of the situation is that you may be facing maximum penalties for which the IRS will easily be able to garnish your wages, levy your assets, and/or take other measures to force you into a state of compliance.  In consideration of the growing group of foreign territories agreeing to ‘join forces’ with the United States in its relentless effort to annihilate the prospect of tax evasion, it’s becoming ever-so-clear that – soon – there will be nowhere in the world in which you’re able to avoid the IRS for any extended period of time.

The fact that you ‘may be facing penalties’ is key for many taxpayers – particularly those who can legitimately claim ignorance or – after actually filing a US expat tax return and claiming all allowable deductions – find they have no tax liability, which is often the case with US Expats; but we’ll get back to that.

There are 2 different penalties assessed by the IRS for US expat tax return noncompliance:

  • Failure to file:  If your return is filed late but filed within 60 days of your US expat tax return due date, you could be assessed anywhere between 5% and 25% of your total tax liability for each month that passed without your filing a tax return.  If your US expat tax return is more than 60 days late, the minimum penalty you could be facing would be the smaller of either $135 or up to 100% of your actual or perceived tax liability.
  • Failure to pay:  The failure to pay penalty may be assessed alone or in addition to the failure to file penalty – depending on whether or not you filed a US expat tax return.  In most cases, the failure to pay penalty is assessed because a US expat tax return with a due balance was filed and not accompanied by a full (or at least close to full) payment of the tax liability indicated on the return.  Generally, the failure to pay penalty is assessed at a monthly rate of 0.5% of your actual or perceived tax liability.

It is possible to have not filed a US expat tax return at all and be assessed both penalties after the IRS having filed a substitute return on your behalf.  In this situation, the failure to file penalty would be slightly reduced by the failure to pay penalty in the first 60 days.  If you still haven’t filed a tax return or satisfied the IRS’s version of your tax liability after 60 days, you will be facing the same minimum failure to file penalty indicated above ($135 or 100% of tax liability).

What We Mean by, “Actual or Perceived Tax Liability” and “The IRS’s Version of Your Tax Liability”

The IRS filing a substitute US expat tax return is typically what happens if no tax return is filed.  If the reason you didn’t file your US expat tax return was a misperception of the US Tax Code (like confusing the availability of the FEIE to indicate you aren’t required to file a return), you can generally get these penalties completely reversed by filing a US expat tax return and mailing it to the IRS with an explanation of why you hadn’t filed.  If – by the time you file your return and your US expat deductions make it so that you have no US tax liability – the IRS will not charge you any penalties for having filed late.  It is important to be aware, however, that if you don’t claim your refund within 3 years of the original due date for the return, you forego all rights to a refund.

While this is the main reason for penalties being reversed by the IRS, it’s not the only reason.  As stated in IRS Publication 17, taxpayers who are able to prove their negligence was due to reasonable cause (yes, misinformation IS one of them) and not a case of willful neglect will be able to have fees reversed and will not be required to pay them.

Failure to File FBAR Fees:

A requirement to file Form TD F 90-22.1 generally applies to more US Expats than stateside American Citizens and Green Card Holders, as living and working in a foreign country increases your chances of holding money in foreign banks.  While it’s historically uncommon for US Expats to be assessed with maximum failure to file FBAR penalties, the US Department of Treasury is – by law – able to assess a penalty up to 50% of your foreign assets or a flat penalty of $100K per account you failed to report (whichever number puts more money in their hands) and seize that amount electronically within minutes after having made the decision.

Even though US Expats haven’t historically been assessed with maximum fees, many experts feel that will no longer be the story once US Expats who have long been suspected of international tax evasion are identified in coming years when the full force of this year’s FATCA initiatives are being realized.

Only Remaining Possibility of Reduced Penalties

If you are in a willful state of noncompliance, the IRS is currently offering 2 programs which could drastically decrease the amount of penalties you’re assessed for filing back taxes with US tax liability and/or late FBARs. They are:

These 2 measures taken by the IRS to negotiate with American Taxpayers are in direct support of the goal to encourage as many as possible to file past due tax returns and Forms TD F 90-22.1.

If it weren’t for global FATCA initiatives which have (in all likelihood) forever changed the international landscape for tax dodgers in multiple countries, this ‘last ditch effort’ by the IRS to get as many US Citizens, Green Card Holders, and Nonresidents with NR tax filing requirements in a state of compliance to avoid facing maximum penalties (which could include criminal prosecution) may seem like an empty threat.  The fact is, though, admission into these programs seems to be the last opportunity that will be offered to taxpayers before recently signed international information sharing agreements are in effect and the Department of Justice begins taking federal indictment recommendations from the IRS.

Let Us Help You Become Compliant

Taxes for Expats is among the top trusted names in the IRS and a wide variety of international US Embassies, Consulates, and foreign tax regimes.  We have negotiated on behalf of thousands of US Expats with an earnest desire to wipe the slate of their tax debt clean while saving as much money as possible avoiding excessive fees.  We know how to provide honest answers while portraying you in the best light possible, and we are confident that having us in your corner will prove to be financially beneficial to you.

Ines Zemelman, EA
Founder of TFX