Filing Back Taxes as an Expat
It's not a written law, but anyone who is familiar with the workings of the IRS knows that the agency does not prosecute individuals who voluntarily file their back taxes. This doesn't mean they won't prosecute those who don’t come forward, though, and if they have to come after you (instead of the other way around), you will not find yourself in a comfortable position. In fact, failure to file is punishable by up to one year in prison (and/or $10,000) for each unfiled year! It is highly unlikely that you will serve time in prison (that punishment is reserved for a select few), but the penalties will still be harsh.
Now - you may not have any idea how to even begin the process of filing your back taxes. But it is probably easier than you think, especially if you have a knowledgeable professional guiding you. At Taxes for Expats we have helped hundreds of American expatriates file their back taxes and know exactly how to navigate this tortuous process.
If you would like to have an expert by your side - talk to us and we will explain how we can help. Our fees are extremely fair (we charge $299 per year if you income is below $100K and $399 if it’s over $100k) and we even offer a 10% discount to customers who file multiple years at a time.
Why You Should File Back Taxes from Abroad, Even if You Are Late
We’ve written an article explaining why American expats should file a tax return every year. But we also appreciate that not everybody had the chance to do this. Here are the top 4 reasons to catch up with your back taxes:
- While you are worrying about how to file your back taxes, looking over your shoulder and wondering if it's really worth the effort, the penalties and interestthat you owe are mounting. After about 5 years the initial tax bill will almost double. The IRS has a very effective (but not efficient, i.e. "slow") method of locating late filers. And if they don't find you for several years, that only means that the accrued interest will be that much higher when they do.
- If you don’t file on your own, the IRS has the right to file a "Substitute for Return" on your behalf. You do not want this to happen. If the IRS files on your behalf, they are not obligated to (and will not) apply any federal exemptions - that means no expatriate exclusions or deductions. You may actually go from zero tax due to tens of thousands of dollars!
- Once the IRS files a substitute return, they will immediately attempt to collect what is owed. They may do so by levying your wages and accounts or attaching a lien to your property. While in debt to the IRS, you will not qualify for car loans or mortgages. The IRS may even snatch your Social Security benefits to collect on the owed amount! Even if the IRS has already filed a substitute return, it is still in your best interest to file your back taxes. The IRS smiles on any effort on your part, and they will most likely adjust your balance.
- The IRS will eventually find you. They have a complex computerized system that works slowly, but surely. If you think that living abroad can save you, be careful. The IRS is working closely with foreign governments to get information about US Expatriates:
How to File
When filing for many years, versus just the past one, it can be much more difficult to locate the necessary forms. Nevertheless, it is important that you locate the relevant W-2s and 1099s (or local country equivalents). You may have to contact previous employers to obtain these documents. In the rare case that the IRS does not have the information you need, you can file using form 4852 which is a substitute for a W-2.
Typically, the IRS will request that you file the previous six years' tax returns. They may, however, request even older returns. To find the forms relevant to each year, visit the IRS website. If the IRS finds you and requests that you file your back taxes, do so immediately (whether or not you have the money to pay). After filing, you can then work with a professional to establish a payment plan or settlement.
When filing out the forms, do not rush. Be sure to claim every relevant credit, deduction and exemption as this will significantly lower your amount owed. Even if you are a very quick study, the complexities of tax matters (written to be complex) are so intricate that it is wise to have a professional in your corner. This is especially true if you expect a liability that you cannot immediately pay and need a go-between to approach the IRS on your behalf. When choosing a tax professional, look for a tax attorney or a CPA that has the authority to both file and arrange for a payment agreement. Without a professional, the simplest way to set up a resolution is to request an "Installation Agreement" when filing your back returns.
Key to Success - Work With an Expert
What’s important is not to delay. You may be tempted to stall out of fear or lack of financial means, but the longer you wait, the worse matters will become. The IRS is not usually in a hurry to find you for this exact reason. Do not wait until they do. The peace of mind you gain by acting quickly is priceless!
When you do file, do not do so on your own. Filing back taxes is a complicated process. And it's one that, if not done correctly, will cost you much more than it should. Having an experienced tax professional by your side can make a large difference to the end outcome. Do not be bullied by a large government organization. Hire someone that knows his/her way around and can fight for the most lenient settlement possible. At Taxes for Expats, we have helped hundreds of expats file their prior tax returns and get in good standing with the IRS and are ready to help you.
I.J. Zemelman, EA is the founder of Taxes for Expats