Expats IRS Filings – A Minefield Map

Does the thought of dealing with the IRS keep you awake at night?

How certain are you that you have told the IRS about everything they need, from foreign bank accounts to pension benefits and stock options?

Did you know you may be able to virtually eliminate late filing penalties?

Many US ex-patriots dread dealing with the Internal Revenue Service (IRS). There are good reasons for this negativity ranging from the complexity of the US tax code to dread of a tax audit. However, putting it off makes any problems worse.

US expat taxes are complicated because you may be liable for state taxes as well as federal IRS charges.

Your IRS Obligations

As a US citizen you must fill in a US tax return (Form 1040), even if you have no US income and all your earnings are fully taxed in the UK or elsewhere. Hopefully, you will not have to pay US tax on your British income because of reciprocal agreements between HMRC (UK tax authority) and the IRS, but you must still notify the IRS of your foreign earnings and benefits.

Screenshot source

Filing thresholds are lower than you might think, see above screenshot.

You must tell the US Treasury Department (Not the IRS.) about any UK or other non-US bank accounts electronically filing the FinCen Form 114 FBAR form. The $10,000 threshold includes the total of your current, savings and pension accounts, and includes ANY accounts where you have signature withdrawal rights, even if they are in a spouse’s name.

The Affordable Care Act obliges every American to have health insurance. Exceptions apply for ex-pats, but you need to attach a completed Form 8965 to your annual Form 1040 IRS tax return.

On top of your federal obligations, some US states require you to file annual state tax returns, even if you have moved abroad permanently. California, New Mexico, South Carolina, and Virginia are particularly zealous in this respect.

IRS Penalties

There is no Statute of Limitations on tax bills; they never go away, they just get higher with penalties and monthly interest charges.

Screenshot source

Penalties are high.

An IRS Failure to File penalty of 5% per month and a Failure to Pay penalty of 0.5% per month are only the start. If you fail to file:

  • Form 8938 – showing interests in foreign financial entities – $10,000 per account per year
  • Form 5471 – Officers or shareholders of certain foreign corporations – $10,000 per form per year
  • Form 3520 – Foreign trust transactions – $10,000 per form per year
  • FBAR Form 114 – Foreign bank accounts – Deliberate non-filing up to $100,000 per account per year, Negligent non-filing $10,000 per account per year.

Missed Filings

The IRS classes you as a delinquent taxpayer if you have not filed an annual return or notified them of a foreign bank account. There is only one escape route: IRS Streamlined Procedures.

If your non-filing was because you didn’t realise the necessity of doing so or other non-wilful reasons, then you can use the streamlined procedures to get your IRS account back in good standing. You can only apply for this route once, and only if you are not already subject to an audit.

If your application is successful then you can escape all IRS fines, though you will still be liable for any tax owing.

Brexit Implications

The UK/US tax treaty prevents double taxation of individuals and companies, though US citizens are still required to file US tax returns and failure to do so an lead to IRS fines as outlined above.

Brexit is thought unlikely to affect individual US ex-pats in the UK, but the picture for corporate entities is less clear.

Summing Up

IRS dealings are complicated and finding a qualified US CPA to help you can be difficult as an ex-pat. 

If you have failed to keep up with your IRS obligations, the sooner you put things right the cheaper and easier it will be. The IRS Streamlined Procedures give delinquent ex-pats a low-cost way to achieve forgiveness for past omissions, but this route will only be available for a limited time.

Specialist online US taxation services have all the experience you need and could make life less stressful as well as saving you money in the long haul. 

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