How to Avoid U.S. Tax Penalties while Living Overseas
6 min read
April 14, 2023
April 14, 2023
At a glance
Want to avoid up to $50,000 or more in IRS tax penalties and a revoked passport? Follow these 4 tips to avoid U.S. tax penalties and FBAR fines.
Four things you should know to avoid up to $50,000 or more in IRS tax penalties (and a revoked passport)
Living abroad comes with all sorts of unexpected expenses. You may have prepared for extra medical coverage or currency exchange rates, but what about your U.S. taxes? U.S. tax penalties can have a high price tag for expats, and it can be easy to rack up fines and IRS penalties if you’re unaware all your tax filing requirements while living abroad.
For example, let’s say you’ve lived overseas for five years and you’ve never filed a tax return since moving abroad. Considering failure to file tax returns and FBAR can lead to $10,000 a year or more in fines, it’s quick math to see you could already be over $50,000 in the hole. You can even lose your passport if your penalties are steep enough!
We see these types of situations every day, so if this sounds like you, don’t panic. If you want to avoid tax penalties as an expat, you should:
- Know your filing requirements
- Know when you could be charged penalties
- Know what documentation to keep and how long to keep it
- Know your options for catching up on back taxes with amnesty
Sound intimidating? Don’t worry, we’re here to help. Get started with H&R Block’s Expat Tax Services today!
1. Know your U.S. filing requirements.
To avoid U.S. tax penalties while living overseas, you’ve first got to understand your filing requirements. If you are a U.S. citizen or Green Card holder and you earn over a certain amount of income, you have to file a U.S. tax return, no matter where you live. Not only that, but if you have over $10,000 in foreign accounts at any time of the year, you’ll also have to file an FBAR.
In addition to your tax return and FBAR, these are a few other common forms U.S. expats may have to file or face interest and penalties ranging from $10,000 to over $60,000:
These are by no means the end of the list — there are dozens of tax forms U.S. expats may have to use, each with their own penalties. That’s why it may be wise to seek the help of an expat tax advisor if you’re worried about compliance and penalties.
2. Understand when you could be charged with U.S. tax penalties.
The IRS can charge U.S. tax penalties for a variety of reasons, but the most common are:
- Failure to file – If you don’t file your U.S. expat taxes and FBAR by the final due date without an extension (automatic extension to June 15 for your tax return and October 15 for your FBAR) you could be hit with failure-to-file fines. If you owe taxes and you fail to file, fines start at 5% and go up to 25% of unpaid tax—and that doesn’t include fines and interest on the owed amount. There isn’t a penalty for filing taxes late if you owe nothing, but you won’t have access to your refund until you file.
- Failure to pay – If you don’t pay your taxes owed, you’re subject to failure-to-pay fines. First, you’ll accrue interest on the unpaid balance until you repay it in full. Second, you’ll be fined the late payment penalty of 0.5% of the tax you owe for each month it’s late, up to 25%. It doesn’t stop there, though—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 if you submit your taxes on a quarterly basis be sure you’re paying enough.
- Dishonored check – If your tax payment check bounces or your linked accounts are deficient, you may be fined for a dishonored check.
FATCA and FBAR penalties
On top of your tax returns, you’re required to report money in foreign accounts if it’s over a certain amount. You do this with your FBAR (FinCEN Form 114)and FATCA Form 8938. FATCA and FBAR penalties for non-compliance are more severe than failing to file a tax return.
If you meet the requirements and willfully fail to file an 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 if you don’t act timely.
These are compounding penalties — meaning if you willfully ignore the IRS and FinCEN and don’t file for 10 years, you could owe the better part of $500,000 in fines and penalties (not to mention lose your passport and even face jail time).
3. Keep these documents to help avoid tax penalties as a U.S. expat.
A great way to avoid penalties is to have the records to back you up. You should keep the below documentation for at least three years:
- Paystubs/pay slips
- 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)
- Previous U.S. tax returns
- Income taxes paid overseas
- Overseas housing cost
- Interest paid on mortgages
- Interest paid on property taxes
- Dependent education expenses
- Student loan interest and principal payment
- Medical & health insurance expenses
- Proof of time spent in-country
Don’t head for the shredder just yet — there are situations where the IRS suggests you keep these records up to indefinitely, so it’s best to ask a tax advisor about your specific situation.
4. Learn what to do if you’re a U.S. citizen abroad who’s never filed taxes or FBAR
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 for at least 330 days during one of the last three years and not maintained a U.S. abode.
- Confirm that your failure to file U.S. tax returns and FBAR was due to an honest misunderstanding of your responsibilities.
If you do qualify for Streamlined Filing Compliance Procedures, you will need to:
- File income tax returns for the prior three delinquent tax years.
- File an FBAR (FinCEN Form 114) for the prior six tax years.
- Complete a statement of explanation detailing why your tax returns and FBAR weren’t filed.
- Pay the tax and interest due for the last three years.
Avoid fines and IRS penalties on U.S. taxes with the help of H&R Block’s Expat Tax Services
If you want to avoid fines and penalties during tax season, hiring the right expat tax advisor is key. Not only are there dozens of forms and schedules specific to expats, but you’ve also got tax provisions specific to each country to worry about.
We are here to help. Thousands of Americans overseas have already discovered the benefits of using H&R Block’s 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. Ready to file? Head on over to our Ways to File page to check out your options.
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