Forgetting to file federal taxes is an expensive mistake for many of the more than 6 million American expats who are scattered among 160 countries around the world.
As the tax season rolls into gear, even if expats have no taxes to pay, they must still file a return.
But despite the arguing over tax laws for expats raging between politicians in the States, only expats earning more than $97,600 a year have to pay tax even if they have already paid their dues overseas – and that’s where the confusion starts.
The thinking of the Internal Revenue Service (IRS) is if an expat has no tax to pay, the IRS won’t know unless they file a zero return, so will chase them with fines and penalties only to discover nothing was due in the first place.
Those penalties can soon build into eye-watering costs and are not refundable if no tax was owed.
The fines start at $10,000 for deliberate offenders trying to hide offshore earnings and rise to $100,000 of a maximum half of the money in bank and savings accounts.
The situation is made worse as the US and the tiny African state of Eritrea are the only two nations who demand non-residents to file tax returns in their former home.
The cost of filing a return is not cheap, either. Unless the expat lives in a US enclave with a resident tax filer or accountant, finding someone with the necessary expertise to tackle the red tape wrapping IRS tax returns for expats can cost anywhere up to $10,000 – and that includes zero filings.
The Foreign Account Tax Compliance Act (FATCA) that swings into action in the summer is likely to complicate tax filing even more – and add to the confusion as the bottom limits for reporting are $50,000 held in offshore bank accounts or investments worth $50,000 in overseas foreign financial institutions.
That’s almost 50% of the limit for tax exempt earnings and another tax headache for expats.
Then, don’t forget the FBARs that require every taxpayer to file a form declaring every foreign bank account with a balance of more than $10,000.
Expats who have overlooked filing who want to confess all to the IRS are scared to speak to the tax authorities because they are scared of the huge financial penalties that may await them.
The Offshore Voluntary Disclosure Program (OVDP) is an option for expats who have not filed and who have income under the $97,600 limit or owe $1,500 or less.
Disclosure under the scheme lets a taxpayer revise tax returns going back to 2006.
Expats who do not meet the qualifying rules may have other options, but they should speak to a professional adviser.
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