Until 2010 the majority of American expats just ignored this rule. But then came FATCA, the Foreign Account Tax Compliance Act, which requires that foreign financial institutions report on foreign assets held by U.S. account holders. In other words, it is no longer possible for expats to hide their financial activities from the long reach of Uncle Sam.
What are the Tax Obligations of American Expats?
According to Americans Abroad, a non-profit dedicated to helping the estimated 6-9 million American expats living around the world, you may have U.S. tax filing obligations if you have personal income such as wages, salary, commissions, tips, consultancy fees, pension fund, alimony, U.S. and/or foreign social security, interest, dividends, capital gains, rental property, farm income, royalties, inheritance, or payment in kind in the U.S. or abroad. This applies to all U.S. citizens and green card holders, even those who have never lived in the USA or left a long time ago and whose entire income is from foreign sources. The minimum reporting threshold is the same for U.S. residents and expats alike.
Thresholds for tax year 2018 (filing in 2019)
If you have lived at least one year abroad, there are 2 methods by which you can reduce your U.S. tax by a substantial amount, Americans Abroad explains. The first is the Foreign Earned Income Exclusion (IRS Form 2555) which allows you to exclude up to $103,999 of foreign earned income from U.S. tax. The second method is the foreign tax credit (IRS Form 1116), which lets you subtract foreign tax from your U.S. tax (for any income not reported in Form 2555). However: neither of these methods exempts you from filing a tax return and there’s no guarantee the IRS won’t collect any tax.
The only other major difference between residents and non-residents is the deadline, with non-residents allowed an automatic 2-month extension from April 15 to June 15. However, non-residents must pay any tax due by April 15 or interest will be charged starting from April 15.
What Can the IRS Do to Non-Compliant Expats?
As the arm of the U.S. government responsible for taxation, the Internal Revenue Service has wide-ranging powers that enable it to identify, chase, punish, and enforce against people inside and outside the United States who it deems owe money on unpaid income tax or unreported income or bank accounts.
Residents and expats alike may be subject to a late filing penalty for failing to file a tax return on time. The penalty is 5% of the tax owed per month plus an underpayment penalty of 0.5-1% per month, up to a maximum of 25% of your tax balance. If you live abroad but have property (such as a home or vehicle) in the United States, the IRS has the legal right to seize said property if you have tax debts.
In addition to the standard penalties, expats may be subject to additional penalties for not reporting foreign income or bank accounts. Between 2009 and 2018, the IRS ran an Offshore Voluntary Disclosure Program for unreported foreign bank accounts. As of 2019, expats disclosing previously unreported foreign bank accounts may still avoid criminal prosecution but will be referred for a civil audit/examination.
Those who don’t disclose foreign income or bank accounts run the risk of being outed by their foreign bank. The U.S. requires foreign banks to give information to the IRS about all American account holders with greater than a $50,000 balance. Because almost all foreign banks do business in the U.S., the U.S. government has the power to punish them. And given the choice between protecting customers or protecting themselves – banks usually choose themselves.
If You Live Abroad and Have U.S. Tax Debt, what are your Options?
Resolving tax debts is a challenge no matter where you are, although living abroad can complicate things even further. If the IRS takes action against you for unpaid tax debts, there are many different ways to resolve the situation.
IRS payment plan
Also known as an installment plan or installment agreement, this is a common option for taxpayers who are unable to pay their full debt in one lump sum. In this case, you may be able to negotiate a lower amount and pay back the remaining balance in installments.
Currently not collectible
Grants temporary relief to taxpayers who are incapable of paying a tax bill. Note that penalties, interest, and fees will continue to accrue on your tax debt during this time.
A one-time waiver that can be used by qualifying taxpayers to obtain an exemption from tax penalties for a single tax period.
Offer in compromise
If your tax debt is so high that you are unable to pay it in full, the IRS may be open to settling for less than the full amount.
The nuclear option – one taken by thousands of U.S. citizens since FATCA came into effect, including the new British Prime Minister Boris Johnson – is to renounce U.S. citizenship.
Johnson’s case is instructive because it demonstrates that renouncing one’s citizenship only gets you out of having to file future tax returns – but doesn’t wipe old debts. Johnson was born in New York to British parents, moved to England when he was five years old and never returned. In 2014, during his term as Mayor of London, he sold a London home he had inherited – and the IRS came after him for capital gains tax. Johnson initially refused to pay the bill but eventually settled the debt and later appeared on a U.S. Treasury list of people who had given up citizenship.
If in Doubt, Hire a Tax Relief Service
If you’re based outside of the U.S. and find the IRS knocking at your door, the good news is that help is at hand. When it comes to resolving tax debts, there are attorneys, CPAs, and licensed tax agents who can help. There are also tax resolution services, such as The Tax Resolvers and Community Tax, who operate large networks of professionals who can help resolve any type of tax debt – for U.S. residents and expats alike.