Long Arm Of The IRS Stretches Around The World

Americans can take themselves out of America, but they cannot ignore the taxing demands of the Internal Revenue Service.

A common misconception among expats is once they have left their homeland, they no longer have to file tax returns every year.

Although this may ring true for many countries, Americans are always beholden to the IRS, regardless of where they live or how long they have spent away from the USA.

Here are some of the most common tax mistakes US expats make:

I make tax filings where I live, not in the USA

Wrong. US expats have the privilege of having to make tax filings every year. The USA and Eritrea are the only countries in the world that require expats to deliver a tax return even if they spend all their time overseas.

I don’t have any tax to pay, so I don’t need to complete a return

Wrong. Most countries, including the USA, have the concept of the nil return. The nil return may be full of zeroes because you have no income to declare and no tax to pay, but the Catch-22 is if you do not file a nil return, the IRS does not know you have nothing to pay – and will fine you if you do not tell them you have nothing to tell them.

US taxpayers also have to file FBARs for cross-referencing against reports from foreign financial institutions about cash and assets held in overseas accounts under the Foreign Account Tax Compliance Act (FATCA) rules.

None of my foreign accounts have a balance of more than $10,000

Wrong. The $10,000 FBAR amount refers to aggregate balances rather than look at each account individually.

Accounts is a catch-all term for checking, savings, investments and pensions – plus any accounts which you may control as a trustee or through business.

My pension and savings contributions are tax deferred, so don’t count

Wrong. The IRS does not recognise this deferral and you may have to pay tax on employer contributions to your pension or savings accounts if you do not have any credits for tax paid abroad to offset against them

I’m afraid to file because my tax affairs are years behind

You still have an obligation to file but it may not be as bad as you think. Under streamlined procedures, thousands of expat taxpayers have had a minimum of three years of filings and six years of FBARs and no penalties.