Brief US Expat Tax Filing Guide for Americans Living Abroad

Did you know that US citizens living abroad are still obligated to file a US tax return? If you are single and have an income of more than $13,850 (for single filers in the 2023 tax year, $14,600 for 2024), you are most likely required to file a return. The United States is one of very few countries that tax their citizens and residents on their worldwide income, regardless of where they live. Although in many cases no income tax is ultimately due to the US Treasury as a result of foreign income exclusions and tax credits, expats nevertheless need to be aware of these filing requirements. Failure to do so could result in running afoul of US taxing authorities and facing noncompliance penalties.

In addition to income tax reporting obligations, the US Treasury is becoming stricter in enforcing foreign asset reporting requirements. If US taxpayers have foreign financial accounts aggregating more than $10,000 within any given year, submission of FinCen Form 114 (Foreign Bank Account Report, or FBAR) is required. The penalties for FBAR noncompliance are not inconsequential. A $10,000 penalty applies in cases of non-willful noncompliance, and a willful failure to file could result in a civil penalty of up to $100,000 or 50 percent of the balance of an unreported account. Considering that this penalty is applied per account, per year, it is serious business indeed.

The Foreign Account Tax Compliance Act (FATCA) places an additional obligation on US expats residing outside the US if the expat owns specified foreign assets which exceed the following thresholds:

Single filing:

• Either $200,000 on the last day of the year, or
• $300,000 at any point during the year

Married filing jointly:

• Either $400,000 on the last day of the year, or
• $600,000 at any point during the year

In the event that any of these thresholds are exceeded, the expat must file form 8938, ‘Statement of Specified Foreign Financial Assets’, with the IRS. Expats also need to be aware that if they own foreign mutual funds, such ownership must be indicated on the form 8938, and a separate form 8621 must be filed for each foreign fund. Foreign mutual funds fall into a category known as ‘Passive Foreign Investment Companies’, for which not only is the reporting requirement quite onerous, but for which the US tax treatment is quite harsh.

Many expats have an entrepreneurial spirit, and start up a business in their resident country. These expats, in addition to those who own a 10 percent or greater interest in a foreign corporation, will very likely be required to file IRS form 5471, ‘Information Return of U.S. Persons With Respect to Certain Foreign Corporations.’  It is important to note that the IRS definition of a Foreign Corporation includes foreign limited liability companies, so that encompasses many small businesses which the US taxpayer might not normally consider to be a corporation.

If you find yourself behind on your US income tax reporting obligation, there is an option called the IRS Streamlined Procedure which in many cases will serve to get you back up to speed. Under this procedure, the taxpayer is required to file tax returns for the past three years and FBARs for the past six years, if applicable. This strategy can be employed in cases in which the tax noncompliance was not willful (e.g. the taxpayer was unaware of his or her reporting obligation). Under this procedure, late filing penalties are not applied but late payment penalties may be applied if the previously unfiled back tax returns result in tax due.

Options are also available for the willful non-filer to become compliant in the eyes of the IRS and the US Treasury, such as the Offshore Voluntary Disclosure Program (OVDP). This program is designed for taxpayers facing potential criminal liabilities and substantial civil penalties resulting from willful noncompliance of their reporting obligations.

Although much of this may seem daunting to the typical US expat struggling with US tax compliance issues, he or she can rest easy with the knowledge that they are not alone in their struggles, and that there are methods available for extricating themselves from seemingly sticky tax reporting situations.

If you feel that you may be deficient in any of these areas and would like further details and advice on getting back in the good graces of the IRS and the US Treasury, contact us today. We are dedicated to helping US expats navigate the complexities of the US tax system.

If you require assistance with your US expat taxes, get in touch today.