US Expats Guide: Tax penalties and how to avoid them

It is the obligation of every US citizen to file their income taxes, regardless of where they are in the world or the currency in which they receive their income.

IRS has put in place exemptions that help Americans living and working abroad reduce their tax bills. But you have to file and claim these exclusions otherwise IRS will assume you owe the country tax on your foreign earned income.

The truth is nobody enjoys paying thousands of dollars as tax. But it gets worse if you fail to file or file late because you may end up paying your tax plus penalty and interest.

Below are the possible penalties for US expats and how to avoid them.

Penalty for failing to file

As they say, it is better to file and owe than not filing and owing. When you fail to file your tax returns even after the extended deadline, you will most probably be penalized under failure-to-file. Apart from that, any tax due will continue to attract interest.

Many expats make the mistake of assuming that if they don’t file their tax returns IRS does not have a way of knowing they owed tax in the first place. They are wrong. IRS receives balance information about accounts held by US citizens from nearly all foreign bank. Additionally, IRS can access foreign tax information.

Apart from penalties and interest, you can lose any refund if you fail to file. Of course, the IRS will not penalize you if you are eligible for a refund, but you must file to receive a refund. Normally, the IRS gives a grace period of 3 years to file a tax return and claim a refund. Beyond this period, you are ineligible for a refund.

Penalty for late payment

Like Americans living in the country, American expats are subject to penalties for filing their tax returns late. However, most Americans living or working abroad have to file foreign taxes before they file US taxes. IRS, therefore, gives expats an automatic extension of two months. The deadline for US citizens in the country is April 15 and June 15 for US expats.

If you fail to pay by June 15, the tax due attracts a 5% interest every month, up to 25%.

With the exclusions provided by the IRS, you may end up not paying any taxes. However, you have to file and claim them. Otherwise, you still owe taxes to the US and penalties still stand.

Expats who may not have filed by June 15 may apply for another two-month extension until October 15.

Penalties for filing wrong or fraudulent returns

Mistakes are bound to happen when filing returns. IRS forgives most of these simple and unintended errors. However, it retains the legal right to impose fines where:

  • A person claims a refund or tax break by mistake – a 20% penalty on the tax underpaid may be applied
  • A person intentionally understates their tax bill – a 75% penalty on the tax underpaid may be imposed

Avoiding penalties is simple. File your tax returns in time and give the correct information. You can seek help from professionals such as https://taxfyle.com/taxes-for-expats to guide you through this complex process.

 

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