It’s that time of year again—are you ready to file your U.S. tax return? Filing while stateside can be complex enough, and expats have a few extra layers of complications added. In this article we’ll dive into the IRS tax penalties common to U.S. expats, and tips to avoid them this year and in future years.
Written exclusively for Expat Network by Eric Scali, Region Tax Manager for H&R Block Expat Tax Services
When you leave behind the U.S. to work and live abroad, there are bound to be a few surprises. From memorizing your new neighborhood to adapting to the local customs, there’s a lot of learning to do, and not much time to do it in. One surprise you should do your best to avoid, however, is getting charged with a U.S. tax penalty.
Tax penalties for expats can range anywhere from having to pay a small monetary fine to potentially losing your passport. That’s right—if you’re delinquent enough on your tax filing obligations you could actually lose your passport.
To avoid getting in that sort of situation, you should be sure to learn your filing requirements, including understanding when you could be charged with penalties, what to do to prevent it, and how to catch back up with amnesty.
U.S. Tax Filing Requirements for Expats
To avoid penalties, you should understand the basics of your U.S. tax filing requirements, including if you have to file. You must file a U.S. tax return if you are a U.S. citizen or Green Card holder and earn over a certain amount of income.
Your filing obligation may not end there—if you’ve held more than $10,000 in foreign financial accounts at any time during the year you have to file a Report of Foreign Bank and Financial Accounts (FBAR) and you may have to file FATCA Form 8938.
Other common forms you may have to file are:
Live and Work Abroad? Keep these Records
If you live and work abroad, you should keep the below documentation (or know where to find it). That way, if you’re charged with an IRS tax penalty, you have the documentation you need to correct it. Keep these records handy for at least three years:
- Paystubs/pay slips or a tax assessment document if you don’t have a W-2 (your P-60 from the U.K., or an Australian PAYG payment summary, for example)
- Income taxes paid overseas
- Previous U.S. tax returns
- Overseas housing cost and dependent education expenses
- Interest paid on mortgages and property taxes
- Student loan interest and principal payment
- Medical & health insurance expenses
- Time-keeping records for proof of time in-country
The IRS may need these records after three years, so we suggest you keep these records up to indefinitely. If you’re unsure, ask your tax advisor for advice on your specific situation.
U.S. Tax and FBAR Penalties
Now that you know your obligations and records to keep, we can dive into common tax penalties expats find themselves facing. The two most common U.S. tax penalties are Failure to File and Failure to Pay.
You may be charged with a Failure to File penalty if you fail to file your tax return and FBAR by the due date. Failure to file fines start at 5% of the unpaid tax and go up to 25% of the unpaid tax.
Failure to Pay fines can get even more severe. On top of accruing interest on the unpaid balance until you repay it in full, you’ll be fined the late payment penalty of 5% of the tax you owe, up to 25%. On top of the monetary fines, penalties for serious tax evaders and major delinquency can result in a revoked passport and even jail time. There is a tax penalty for underpayment, so be sure you’re paying enough if you submit your taxes on a quarterly basis.
On top of your tax returns, you may have report foreign financial accounts on your FBAR (FinCEN Form 114) and through FATCA Form 8938. FATCA and FBAR penalties are more severe than failing to file a tax return—if you’re found to have willfully failed to file your FBAR, you can be fined up to the greater of $124,588 or 50% of the total balance in all your overseas accounts. If you meet the requirements and fail to file FATCA Form 8938 you can be fined from $10,000 up to $50,000.
What to Do if You Just Found Out About the Tax Filing Requirement for Expats
If you’re a U.S. citizen abroad who has never filed a tax return or FBAR while living abroad, don’t stress—if it was an honest mistake there’s an option to get caught up with amnesty through the Streamlined Filing Compliance Procedures and Delinquent FBAR and Information Report Procedures. To qualify, you must:
- Have lived in a foreign country without a U.S. abode for at least 330 days during one of the last three years
- Confirm it was an honest mistake that you failed to file U.S. tax returns and FBAR
If your case is found to be unwilful, you may see your penalties forgiven—as long as you don’t fall back into non-compliance during the next tax season.
File Your Expat Taxes with Confidence with H&R Block Expat Tax Services
Filing U.S. taxes while working abroad is complicated and choosing the wrong service can lead you to miss out on all the tax benefits accorded to you. Stay in compliance and be sure you’re getting every credit and deduction you’re entitled by filing with H&R Block Expat Tax Services. Whether you file expat taxes yourself with our online DIY expat tax service designed specifically for U.S. citizens abroad or file with an advisor, H&R Block is here to help.