Lately, TaxMama® has been getting questions from tax professionals about clients who have moved out of the U.S. and have not filed tax returns. Those folks are now in deep trouble.
Dear Family,
If you have American family, friends or associates living or working outside the United States, please check with them immediately. Make sure they have been filing their U.S. tax returns each year. Why?
Well, let me give you some facts and some tips.
1) By Americans, I mean citizens or green-card holders. Americans are responsible for filing annual income tax returns to report their world-wide income – always.
2) But, you say, they are earning less than that annual amount that isn’t taxable!
Perhaps. But that exclusion of taxable income (which happens to be $105,900 in 2019) only works if you file a tax return.
3) In fact, that Foreign Earned Income Exclusion (FEIE), reported on Form 2555, only applies to EARNED income. That includes wages and various forms self-employment income. It does not include investment income, retirement income or any other kind of income. All of that is still taxable. You can see the details of what is and isn’t included on this IRS summary page.
4) And since you’re overseas, you probably have bank accounts with $10,000 or more in them (that’s the total of all accounts). Which means you needed to have filed a special banking form with the U.S Treasury every year.
- a) Not filing that FBAR form carries an annual $10,000 penalty. Filing it is free, and it can be done online. https://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html
- b) There is another form, Form 8938, that goes with your tax return, if you have assets in excess of $200,000 (single) or $400,000 (MFJ) outside the U.S. (There are more details to this – you’ll find them here.) Again, big penalty for not filing. Free to file – just include with your tax return.
5) And here’s some really bad news. Those folks who still maintain a connection to a U.S. state – the state probably taxes ALL your income. They don’t generally have foreign income exclusions.
6) And for those folks who left the U.S. owing a bunch of taxes – if you think leaving for 10 years makes the taxes expire – boy have I got bad news for you!
The IRS statute of limitations on balances due STOPS while you’re out of the country. So, not only does the balance remain, it grows and grows and grows –with penalties and interest.
7) For visitors to the U.S., folks with visas of any kind, or even (ssshhhh) illegals, you probably need to file tax returns, too. Jean Mammen, EA wrote a terrific book to help you. Here’s a link to 1040NR? or 1040? U.S. Income Tax Returns for Visa Holders +: International Organization and Foreign Embassy Employees.
So, it’s time to get the tax act together. Here are some tips
- a) If the folks are not planning to return, they must cut their ties with their home state (unless that state has no income tax). If they need a U.S. address, find a mailbox service or VERY trusted friend in a tax-free state. Change voter registration to the tax-free state; get an international, or foreign drivers’ license – dump the state license…etc.
- b) Catch up on all tax returns with the IRS and state (a tax pro who is experienced with representation will know how many years are the minimum, in each situation). Most likely, 6-10 years will need to be filed.
- c) Catch up with the FBAR and FATCA filings. By reporting all the foreign income in each of the years, you might be able to minimize penalties.
Yup, it’s not going to be easy. But it took a long time to get into this mess.
For folks who have just moved overseas, you can see why it’s important to get on track correctly in the first place, to avoid this entire problem. Done correctly from the beginning, you’re apt to avoid all U.S. taxes and penalties in the first place.
And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At https://iTaxMama.com/AskQuestion
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