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Tax guide
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Tax Guide
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Why Americans abroad should file U.S. tax return

1. First and foremost, it's the law - If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S. It's that simple.

Whether or not you end up paying tax on that income is irrelevant - the income itself must be reported. We might as well end the list right here but there are five more reasons that actually make filing U.S. Tax Return advantageous to you:

2. If you fail to file, you cannot claim foreign income exclusion and you may be liable for penalties.

You are eligible to exclude up to $100k if you meet the qualifications for FEIE. However - you must file in order to avail of this exclusion - it is not given automatically.

3. There is a three year statute of limitations on filed tax returns.

If you do not file, the statute of limitations never runs out. Therefore it is in your interest to file to 'run the clock' and not leave yourself exposed to an audit down the road.

4. Most of our clients never actually have to pay anything to the IRS...

The combination of taxes paid in the host country and various deductions available to expats results in no cash outlays.

5. If you are a green-card holder, filing U.S. tax return establishes...

"Good moral character" in the eyes of INS USCIS for immigration compliance.

6. If you do owe money to the IRS and do not report it, you are liable to pay penalties and interest...

Which accrue in perpetuity. After about five years, the amount of penalties accrued may more than double the original tax bill (compare it with stock market performance, which is flat for the last 10 years).

Let's look at some real numbers to really bring this point home. Below we plot what would happen to $1,000 invested in the U.S. stock market (Dow Industrials) vs $1,000 owed to the IRS. Assume that tax was due on January 1, 2005.


For those who like to play with the numbers, you can find the actual spreadsheet here.

As you can see, the stock investment has done very little, while the tax bill has almost doubled in 5 years.

7. U.S. government is actively exploring the option of refusing

Renewal of US passports for delinquent taxpayers. Congress requested a study by the Government Accountability Office (GAO) to look into whether withholding US passports from individuals with outstanding tax balances would increase IRS tax collections. The study, released by the GAO in March 2011, suggests billions in unpaid tax revenue could be claimed by the IRS if individuals owing taxes were denied US passports.

As federal deficits continue to mount, the federal government has a vital interest in efficiently and effectively collecting the billions of dollars of taxes owed under current law. Federal law already allows the linkage of debt collection with the passport issuance process in certain areas, including for certain outstanding State Department debt and child support enforcement, the report said.

8. As you have probably heard, the US government has started ...

To actively pursue its citizens who have unreported foreign bank accounts. Congress has passed numerous laws that make it a criminal offense with draconian fines and even a threat of a jail sentence. IRS allows US citizens to come clean and report these foreign accounts under either the quiet disclosure or an occasional Offshore Voluntary Disclosure Initiative. However - whichever program you follow, you must declare that all your past due tax returns are filed.

9. Lastly - the government is actively working with foreign countries...

that have large numbers of US expats in order to secure information about them:

If you happen to live in a different country, it is only a matter of time before they will get there. Ultimately the graph below presents all the information you need to know. US debt is exploding and the government is doing all it can to improve collection.

The government knows that over 8.7 million Americans are living abroad and only approximately 500,000 file income taxes abroad. Their goal is to increase that number by any means.

These are the reasons why American expats should file their US tax returns. We have also prepared a list of reasons why you should enlist the services of Taxes for Expats to help you file.

But what if you have left the U.S. shores years ago and don't plan on coming back?

Let's examine the following scenarios which may apply to you or your loved ones. We have established that you are not abroad for a year or two on a business secondment, but have moved permanently and have no intention of returning to the U.S. Should you still file your U.S tax return? Are you at risk of any repercussions for failure to file? If you don't file, how will the IRS find you? Below we lay out a few situations that we have observed in many years of practice.

1. You are an expat and get married to a non U.S citizen in the country you currently reside.

After your honeymoon, you want to introduce your new spouse to your family and visit them in the US. Without filing federal tax returns, this may be difficult. In order for your spouse to obtain a U.S visa, you must submit copies of tax returns for the last 3 years.

2. After living abroad (and not filing a tax return) for years, you switch jobs and decide to come back to the U.S.

What do you tell the IRS once you begin filing again? How will you remain in good tax standing and avoid being flagged by the IRS in the future? Look at it from the perspective of the IRS. You have been M.I.A for years and they have no record of what you did for money or where you were employed.

3. Your hard work paid off and you have done well for yourself while abroad.

Hopefully, you don't stuff your wealth in your mattress and instead you look to invest your earnings in the largest and most liquid stock market in the world - or deposit it at an American bank. How do you demonstrate where the funds came from? Unless you want the watchful eye of the U.S government upon you, it's best to have paperwork prepared.

4. Along the same vein, let's imagine that you would like to return to the U.S and buy a home.

How do you prove where the money came from? Will the government question whether it was obtained legally?

5. The three year statute of limitations only starts counting when a tax return is filed.

If you never file - the clock never starts counting and, therefore, it never runs out. In other words - there is no statute of limitations on unfiled tax returns!

6. Hopefully, you've done extremely well and have amassed a great deal of wealth and would want to leave it to your relatives or various foundations.

How will your descendants explain the source of their inheritance? What questions from the IRS will they have to answer? Is there a chance that they will face your non-compliance penalties and overdue taxes?

7. Currently, it is not a requirement to present copies of prior years' tax returns to renew your passport.

With enhanced security measures, could this be an added requirement in the future?

8. If your child is of college age, or if you have younger children whom you would like to see enter college in the future...

Ideally you would be able to pass some of the financial burden onto the government by taking advantage of numerous government assistance programs. How will you prove that you are indeed eligible for financial assistance without producing copies of your tax returns?

9. Let's say you're turning 62 and after years of paying Social Security taxes...

You are finally able to reap its benefits. How will you prove your eligibility without producing copies of tax returns?

10. Finally, expats can exclude roughly $100,000 of foreign earned income from tax calculation

Most importantly, in order to exclude it, you first must declare it by filing a tax return. If you don't file a tax return you risk losing the exclusion. If you lose the exclusion, the IRS has the right to include it in your taxable income.

These are just a few of the common pitfalls we have encountered in over 20 years of preparing tax returns for U.S citizens living abroad. The risk/reward is clear -- for expats, all the upside lies in filing your tax return and only downside can come from failing to file.