6 Common US Expat Tax Mistakes (And How to Fix Them)

6 Common US Expat Tax Mistakes (And How to Fix Them)

6 Common US Expat Tax Mistakes

When a US Person resides overseas a majority of the time, they are referred to as expats. Unlike almost every other country across the globe, the United States follows a citizenship-based taxation/worldwide income tax model. That means when a person is a US Citizen or Lawful Permanent Resident and resides overseas, they are generally still taxable on their worldwide income — including having to pay US tax on foreign income. Even if the US Expat resides overseas and earned all their income overseas, they are still required to file US taxes. Let’s look at six common expat tax mistakes — and how to fix them.

Not Filing Taxes at All

One of the biggest misconceptions that many expats have is that if they reside outside of the United States they are not required to file US taxes – but this is incorrect. The United States follows a worldwide income tax station model. That means if a US citizen, lawful permanent resident, or other US tax person resides overseas, they are still technically considered a US person and still must file US tax returns to report their worldwide income.

Not Reporting Worldwide Income 

For some expats, they do file their US tax returns — but they only report their US income. If an Expat resides outside of the United States and has income from many different sources, then all of those sources of income must be included on the US tax return. As stated another way, even if a person resides outside of the United States and earns income from sources both within the United States and outside of the United States, all domestic and foreign sources of income must be reported on the tax return.

Reporting Net instead of Gross with FTC

When a person has earned income overseas and has paid foreign tax credits on that income, it is generally always better to report the gross income and the total foreign tax credits than to report the net income only. Here is an example: The taxpayer earned $1,000 of foreign interest income and paid $200 of foreign income tax. If they report their net income of $800, then they will now pay US tax on $800. If they report the $1,000 of income but then report $200 of foreign tax credits, they may qualify to have most if not all of their US tax liability on that foreign-sourced income eliminated.

Failing to Report Foreign Assets

When a person resides in the United States or abroad, if they have foreign financial assets then they are required to disclose these assets on various international information reporting forms each year if they meet the threshold, such as the FBAR. There are other forms they may have to file as well such as Form 3520, Form 5471 Form 8938. Failure to report may result in significant fines and penalties – but amnesty may reduce or eliminate penalties.

Failing to Make a Treaty Election

Oftentimes, if a person is a permanent resident of the United States but resides overseas as an expat, they may qualify for a treaty election to be treated as a foreign person for US tax purposes. This may reduce if not eliminate their US tax liability. But, to make the election, the expat must be in a treaty country and qualify under the specific treaty. In other words, a person cannot just move overseas and stop filing taxes because want to be considered a foreign person; rather they must file taxes and notify the IRS by filing the proper IRS Form 8833.

Continuing Not to File

Just because the US government has not caught up to you yet, does not mean that they may catch up to you at some point. While they generally do not pursue foreign assets — although they can — they may make it very difficult for you to travel — by revoking or denying the renewal of your US passport. They may also issue a levy, lien, or even seize your US property.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties

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Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

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