What happens if a US Expat fails to file federal taxes?
Every US citizen including the expats settled abroad has to file their federal taxes with the IRS. This is because of the citizenship based taxation system.
Under this system the US expats have to file federal taxes on their global income even if they live and earn money outside the country. If any US Expat fails to file federal taxes they invite significant consequences including huge IRS penalties and interests.
The US Expats must report their worldwide income annually if it exceeds certain thresholds. Also, they need to report foreign financial accounts under the FBAR and foreign assets under FATCA. While the IRS offers exclusions and credits like Foreign Earned Income Exclusion and the Foreign Tax Credit, filing federal tax returns is mandatory to claim these benefits.
What consequences a US Expat have to face if they fail to file Federal taxes?
- Late Filing fines or penalties: The IRS imposes huge penalties or fines of the unpaid taxes for each month or part of month the return is late. Even if the US Expat does not own any taxes, failure to file can result in penalties if additional reporting FATCA or FBAR are required.
- Interest on Unpaid Taxes: If you owe taxes, the IRS will charge interest on the unpaid amount starting from the original due date of the return. The interest compounds daily, adding the overall tax liability.
- Loss of Exclusions and Credits: If US Expats fails to file federal taxes they cannot claim tax-saving benefits like FEIE or FTC. This can result in double taxation where the US Expats end up paying taxes in their host country and to the US.
- FATCA and FBAR Fines: If you are an US Expats, settled abroad, you have to report your foreign accounts or assets to the IRS. Failure to do so can lead to huge fines or penalties. The FBAR penalties are charged up to $ 10,000 for non-willful violations, for willful violations and the penalty can reach up to 50% of the account balance or $ 100,000 (whichever is more). The FATCA penalties start from $ 10,000 with the additional fines if not remedied.
- Revocation of the passport: If the US Expat owes more than $ 59,000 in taxes, penalties and interest, the state department can revoke or deny the US Passport renewal.
- Legal Consequences: Failure to file taxes for an extended period by the US Expats could result in criminal charges if IRS determines the failure was willful. The conviction may lead to huge fines and imprisonment.
Failing to file the federal taxes by an US expat can have serious consequences. It is advisable to work with a professional expat tax service provider who will help the expats avoid these pitfalls and ensuring the federal taxes are filed one time.
