Common U.S. Expat Filing Mistakes
There are a few common mistakes that tax experts often call out when reviewing tax returns of expats. It is beneficial to be aware of these mistakes so you can be cognizant to avoid them in the future. The mistakes include:
- Failure to include Form 2555 or Form 1116 in your filing. Tax Form 2555 is the Foreign Earned Income Tax exclusion form, and it helps determine how much of your foreign income is to be excluded and determines your residency through the bona fide residence or physical presence test. Form 1116 is the form required to claim a foreign tax credit. Failure to include both of these forms can work against you during tax season, and leave you paying higher taxes than you otherwise would have.
- Failure to claim the child tax credit. Another technique to save money on your taxes is ensuring you are filing for all tax credits that you qualify for, including a child tax credit for each dependent in your care.
- Failure to file an extension past June 15.
- Failure to file an FBAR with your tax return. The FBAR is an important form for the IRS to have, and failure to file can result in large penalties and fees.
Making these mistakes can cost you more money in the long run, which is why it is important that you ensure you are filing all necessary forms and filing them correctly. The best way to ensure complete compliance with expat taxes is speaking with a seasoned expat tax lawyer about your situation and having them review your filings prior to submission to the IRS.
What Happens if You Don’t File Taxes While Living Abroad?
Likely the biggest mistake of all you can make as an expat living abroad is failure to file any taxes. The failure to file the forms above will ultimately result in the loss of any potential tax breaks, but the failure to file any tax return can result in hefty penalties and potentially prosecution.
Neglecting to file your income tax return on time results in three different types of penalties, depending on the situation you find yourself in. The failure to file penalty is the most expensive, and can result in a 5% charge on the money you owe in taxes, with an additional 5% being added each month. The maximum penalty is 25% of the taxes owed, paid in addition to the taxes owed to begin with. The failure to pay penalty is lower in comparison, with .5% being owed, and this also increases by .5% monthly, but this penalty can also add up over time if a taxpayer does not take steps to get back into compliance with taxes. Missed payments will accrue interest, which is the third type of penalty an expat may face if they fail to pay fees overtime. Interest begins accruing on the April 15 deadline, and stops once the tax payments are settled.
Failing to file FATCA or FBAR forms can result in even steeper penalties. For FATCA, penalties can include a $10,000 fine, which can increase overtime up to $50,000 and a 40% charge on the value of undisclosed assets. The maximum fine for failure to file an FBAR is $87,000, if a taxpayer has a pattern of negligence.
The penalties can be very pricey for failure to file tax returns, or for filing incorrectly. It is important to avoid creating a pattern of negligence, which can result in further penalties and investigations.
Schedule a Free Consultation With an Expat Tax Attorney Today
The expat tax lawyers at Evolution Tax and Legal has experience dealing with the intricacies of international taxes, and we can ensure that your personal situation will be examined and a plan put in place to optimize your tax solutions. As tax season rapidly approaches, now is the time to put your expat tax plan in place. Contact Evolution Tax and Legal to get started with a free consultation with an expat tax attorney today.