Forgetting your tax obligation as a taxpayer is definitely a messed up situation. You can expect severe consequences if you don’t file your taxes at the right time. Fortunately, there are available options you can choose from if you filed your tax returns late which will also help you avoid or lessen the possible penalties that come with it.
How to avoid fines and penalties?
If you’re one of the many Americans who live overseas, it’s important for you to know that you are still required to file tax returns back in the US. It doesn’t matter if you live in a different country or pay taxes in that country, the IRS still need you to pay taxes. Now, it’s understandable for some people to not be aware of this but it doesn’t mean they are exempted. They can still get back into compliance without having to face significant penalties and fines.
It’s not advisable for you to wait until the IRS finds you since they will no longer give you that many options to resolve the issue. This will also reduce potential penalties for filing late. The Foreign Earned Income Exclusion or the FEIE is one of the best benefits an expat can get from living abroad but if you don’t file your taxes, you can’t take advantage of its benefit.
The FEIE will allow you to exclude up to $102, 100 (2017 tax year) from your earnings overseas. However, the IRS will require you to file a US tax return in order to claim this exclusion benefit. If you missed filing and the IRS finds out what you’ve been up to, you cannot claim an exclusion for the years that passed.
Be Aware Of the Foreign Bank Account Reports (FBAR)
The IRS requires taxpayers to disclose foreign bank and financial accounts along with their US tax returns as long as the combined assets reach a certain amount. Failure to report will result in a huge penalty of up to $10, 000 per year for a non-willful failure report. It’s even worse if you willfully did the omission as you might face civil penalties of up to $100, 000 or 50% of the balance in a foreign account that wasn’t reported. In addition, the fine will charge per year for as long as six years.
The actual amount of penalty, however, will be determined by the IRS and will be considered on a case to case basis. The IRS will not charge you a penalty as long as you include all the earnings you saved on your foreign financial accounts to your US tax returns. For those who never file a US tax return nor FBARs in the previous years is advised to consult a tax professional who is knowledgeable about the issue and knows the best strategy in getting back into compliance.
Filing Taxes and Getting Back Into Compliance
An approach called “Quiet Disclosure” allows a taxpayer to file for the last 3 years of tax returns and 6 years of FBAR that were missed. However, the IRS does not consider it as an official program. But how exactly will you formally resolve the issue of being a delinquent taxpayer without opening yourself to further investigation by the IRS? It’s important that you understand all the options available and the corresponding risks that come with it before you submit missing returns.
Here are the two different programs for delinquent filers:
Streamlined Program For Low-Risk Filers. Regardless if the taxpayer lives in the US or abroad, this is specifically meant for individual taxpayers. A certification has to be signed stating that missing the deadlines wasn’t willful and you have to submit 3 years of late tax returns and the 6 years of missed FBR’s. This program, however, does not guarantee that your tax return will be audited and it may have to undergo further examination. An incorrect tax return can still result in additional penalties and fines.
Offshore Voluntary Disclosure Program (OVDP). If you have significant valuable assets or other foreign interests, this program is the right one for you. This is applicable for those who don’t want to be exposed to potential criminal liability or penalties because of missing tax returns and not reporting taxes due on their assets. This program is more active and will require you to file 6-8 years of back taxes and FBAR’s. The IRS agent will do a Criminal Investigation in each case.
