Do US Citizens Living Abroad Need to File Taxes?

It’s common knowledge that US citizens who meet IRS thresholds are required to file an income tax return. But what about US citizens and residents abroad?  If you’re a US citizen living in a foreign country, are you still required to file taxes with the IRS?  In this blog post, international CPA Ted Kleinman will explain who meets the filing requirements, the potential penalties for failure to file, and special deadline extensions available for US persons overseas.

Do US Persons Abroad Have to File a Tax Return?

Most nations impose taxes on the basis of residency or territorial holdings.  However, the United States is a notable exception to this general rule.  Besides the northwestern African nation of Eritrea, the United States is the only country in the world which consistently imposes tax not only on a residential basis, but also on the basis of citizenship.  Both US citizens and US residents of foreign countries are required to report their global income to the IRS or Internal Revenue Service.

As categorized by the IRS, “US persons” abroad — including citizens, residents, trusts, estates, and business partnerships and corporations — must comply with US tax reporting requirements or face exposure to civil and/or criminal penalties for noncompliance.  By comparison, the IRS classifies nonresident aliens, foreign trusts, foreign estates, foreign partnerships, and foreign corporations as “foreign persons.”

The IRS clearly states the following:

If you are a US citizen or resident alien, you must report income from all sources within and outside of the US.  This is true whether or not you receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or the foreign equivalents…  Additionally, if you are a US citizen or resident alien, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the US or abroad.

You meet the filing threshold if your income is:

  • Single
    • Under Age 65 — $10,150
    • Age 65 or Older — $11,700
  • Married (Filing Jointly)
    • Under Age 65 — $20,300
    • Age 65 or Older — $21,500
  • Married (Filing Separately)
    • Under Age 65 — $3,950
    • Age 65 or Older — $3,950
  • Head of Household 
    • Under Age 65 — $13,050
    • Age 65 or Older — $14,600
  • Widow, Widower 
    • Under Age 65 — $16,350
    • Age 65 or Older — $17,550

Moreover, certain US expatriates are also subject to the expatriation tax in accordance with the provisions of IRC (Internal Revenue Code) Sections 877 and 877A.  Whether you are subject to expatriation tax depends on factors such as the date you expatriated, your average annual net income tax prior to expatriating, and your compliance with filing requirements pertaining to Form 8854 (Initial and Annual Expatriation Statement).

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Can You Request a Deadline Extension from the IRS?

While the standard tax filing deadline is April 15, the IRS allows an automatic two-month extension for individuals residing in foreign countries.  If you are a US person abroad, you must file your tax return by June 15.  (Incidentally, on-duty military personnel and spouses who are filing joint returns may also qualify for this extension.)

You do not have to request this two-month extension; it is already built in for you. However, regardless of the extra 60 days, taxpayers abroad are still considered liable for interest on taxes unpaid as of April 15.

If the two-month extension does not grant you sufficient time, you may request an additional extension by filing Form 4868 (Application for Automatic Extension of Time To File US Income Tax Return).  If your application is accepted, you will have until October 15 to file. Once again, you will still owe interest accrued on unpaid tax after the original April 15 deadline.  You must file Form 4868 by April 15.

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Civil and Criminal Penalties for Failure to File

Failure to file taxes is a serious matter.  Not only can noncompliance with IRS filing requirements result in the imposition of civil penalties, but depending on whether your conduct is considered “willful” or intentional, you could even be targeted for a criminal investigation.  The IRS frequently recommends cases for prosecution to the Department of Justice or DOJ: approximately 3,000 prosecutions per year.

In fact, the IRS and DOJ have intensified their investigative efforts over the past several years, sending a concrete message that no individual or institution can “safely” conceal foreign assets any longer.  Notably, the DOJ recently obtained a guilty plea to felony tax charges from major Swiss bank Wegelin, which confessed to aiding US taxpayers in their attempts to hide Swiss accounts from the IRS.

While Switzerland has borne the brunt of this ongoing controversy as a world-famous tax haven, banking institutions in countries such as India and Israel have also come under investigation. If you have undisclosed offshore accounts, you should discuss participating in the streamlined procedure or Offshore Voluntary Disclosure Program with an experienced CPA. You may also be required to:

  • File an FBAR, or Report of Foreign Bank and Financial Accounts, via FinCEN’s BSA E-Filing System.
  • File Form 8938 (Statement of Specified Foreign Financial Assets) under the provisions of FATCA, or the Foreign Account Tax Compliance Act.

Failure to file FBAR carries a civil penalty of $10,000 per violation, while criminal penalties for willful violations can climb to $100,000 per violation.  Failure to file Form 8938 carries an initial $10,000 penalty, up to $50,000 for ongoing noncompliance.  While the minimum civil penalties for failure to file are capped at $135 or 100% of the unpaid tax, the criminal penalties can escalate to $25,000 plus a year of imprisonment.  This fine rises to $100,000 for corporations.

If you’re an expatriate or US person living abroad, US tax reporting requirements can still affect you.  For experienced professional tax assistance, call CPA Ted Kleinman of US Tax Help at (541) 923-0903 to set up a confidential consultation.