Passport loss and more: Risks of ignoring U.S. taxes for citizens living abroad

Imagine you’ve been living outside the U.S. for a few years, enjoying the culture and lifestyle of your home away from home. You plan a trip back to the States to see family and friends. What you didn’t plan for was finding out your passport was revoked by the IRS.

Alarming, right? But this scenario is a real possibility. The IRS recently said it’s following through on plans to revoke passports or deny renewals for those with tax debt of $52,000 or more. As a first step, the IRS sends at-risk taxpayers a letter. But as many expats know, international mail can be slow – or not arrive at all.

Then, while your letter is in the mail, your case is also sent to the Department of State. This is what could potentially prevent your return trip. Instead of traveling home, you’re stuck in the States until your situation is resolved, which could take months or years. Meanwhile, you may have a job, family and other responsibilities counting on you abroad.

If you’re thinking there’s no way you could owe that much, consider this. Many citizens living abroad don’t know they have to file U.S. taxes, meaning their unpaid taxes start stacking up. Pile on yearly penalties of $10,000 or more for failing to file returns or other required forms and $52,000 is not so much of a stretch.

Here’s what it means to you: If you owe the IRS $52,000 or more and you don’t have a payment plan or other agreement set up, your passport could be at risk.

If this makes you nervous, we get it. You should know the IRS does give you options, such as payment agreements, so you can avoid risking your passport. Plus, you’re not alone – our international tax advisors are experts in helping in these situations.

Other tax matters expats should know about

You might be thinking, “I’ve been filing my taxes; I’m good, right?” Well, maybe, but U.S. taxes for citizens living abroad are tricky and you need to be up-to-speed on the additional rules. It’s truly a case of what you don’t know might hurt you – and cost you dearly.

  • Your foreign pension. Saving for retirement is smart, but the type of account you have matters. You may need to file specific forms depending on the account type and value. If they’re not reported correctly or not at all, you may owe large penalties — starting at $10,000 — but may be more. You need a knowledgeable tax advisor to help you figure out what to do in your situation.
  • Your bank accounts. Don’t owe the IRS? You still might face penalties if you didn’t file the right paperwork (Foreign Bank and Financial Accounts or FBAR) for your foreign bank account. These penalties can be steeper than tax penalties – $10,000 for each violation.
  • The IRS is turning up the heat with enforcement. While the IRS began the program to revoke passports a few years ago, it got more aggressive in 2019 with the involvement of the State Department. This tactic along with FATCA and FBAR reporting rules make it harder for expats to hide. What’s more, the amnesty programs for tax debt, interest and penalties have changed and may continue to change. That said, options available now might not be available in the future.

Tax benefits for expats

Here’s the good news. Expats can take advantage of special tax benefits to help lower their U.S. tax bill and avoid double taxation. For example, you might be able to use the foreign tax credit and foreign earned income exclusion.

Additionally, if you haven’t filed while you’ve been abroad, the IRS offers a way for you to avoid penalties on unfiled returns and FBAR forms. Our tax experts can help you with this amnesty program.

But, as mentioned, taxes for expats can be tricky. Having an experienced tax advisor by your side can make all the difference. You want an expert who knows what’s needed for your situation and location. Luckily, we help expats all over the world do just that with virtual tax prep.