Despite Increased Enforcement, Greenback Sees Few Penalties Imposed for Late Expatriate Tax Returns
Americans living overseas have an obligation to file expatriate tax returns, even if they are already paying taxes and fees to their host country. Many expats forget this — and end up months, or even years, behind in filing. The IRS is taking steps to increase enforcement, like hiring additional employees and significantly increasing tax penalties to include potential jail time. However, those measures may not be translating into imposed penalties on non-complaint expats.
“We feel that there is a genuine desire by the IRS and US Department of the Treasury to treat Americans who are not purposefully hiding or under-reporting assets with leniency,” said Greenback Expat Tax Services President David McKeegan. “Although we obviously can’t predict how an individual case will get handled by the IRS, our experience to date with our clients has been that honest Americans living abroad who may have accidentally misunderstood the filing requirements for expatriate tax returns are not generally getting penalized.”
What If Your Expatriate Tax Returns Are Late?
The first and best step to take is to identify how many years of back taxes need to be filed in order to be caught up with the IRS and Treasury Department. The IRS asks taxpayers to file all years for which they are behind, but six to eight years of expatriate tax returns is usually sufficient. Then, taxpayers should gather necessary documents, provide proof of expatriate status, and determine eligibility for deductions.
David notes, “The Failure to File Penalty is 5 percent for every month a return is filed late, and the Failure to Pay Penalty is .05 percent of the balance of the US expat taxes due. Both are capped at 25 percent.”
The IRS has opportunities for Americans and dual citizens living overseas to catch up on their US expatriate tax returns and FBAR filings. The Offshore Voluntary Disclosure Program provides avenues for expats to become compliant with Reports of Foreign Bank and Financial Accounts, as well as retroactive relief for those who failed to elect deferral on certain retirement and savings plans. The new program will go into effect September 1, 2012.
While David has yet to see any FBAR (Form TD F 90-22.1), late filing penalties at his firm, they have seen a few other penalties, specifically for failure to file and failure to pay. His best advice is to seek the guidance of a expat tax professional if you are behind in filing. If you have questions about preparing your own expatriate tax returns, Greenback Expat Tax Services offers a full-range of expat tax services. Contact Greenback for more information.