All United States tax laws and regulations apply to every US Person whether he/she is working in the UnitedStates or in a foreign country. When it comes to your international tax obligations, it’s important tounderstand exactly how ‘US Person’ is defined by the IRS and what it means to you. Failure tounderstand your tax responsibilities as a US Person can result in hefty penalties associated with yourUS expat tax liability.
Who is a US person?
- Every United States Citizen. You are liable for US income taxes whether you are a citizen who wasborn in the United States or outside of the United States with at least 1 parent who is a US Citizen.If you are a naturalized citizen, you are also considered a US Person.
- Every United States Tax Resident. There are 2 different methods of becoming a tax resident. Oneof these methods is to meet the Substantial Presence Test by having either been in the United States forat least 31 days out of 1 year or 183 days out of the 3 year period prior to the current tax year. Theother method is to meet the Green Card Test; this method applies to any person who has obtained a US GreenCard.
United States citizens born outside of the United States
If you were born outside of the United States and have dual citizenship with the US and the foreign countryin which you were born, you have a different set of options – especially if you’ve never lived in the UnitedStates. It’s important to realize, however, that – until you exercise those options – you are stillconsidered a US Person for tax reporting purposes, and you must meet all of your US tax obligations. Ifyou wish to voluntarily terminate your USCitizenship to avoid being responsible for US taxes, you have the right to do so.
Inactive Green Card holders
If you have never surrendered your US Green Card and your Green Card is considered to be expired by theUSCIS (US Citizenship and Immigration Service) you are still obligated to file a US expat tax return everyyear. You will be required to file an annual US expat tax return until you either surrender your GreenCard or there has been a judicial ruling that your Green Card has been abandoned or revoked. If youhave ever held a Green Card in the United States and you are not sure whether or not you have any currenttax liability, it will be in your best interest to find out and take care of any outstanding taxobligations.
Your tax obligations as a US person
Depending on a variety of circ*mstances including filing status, source of income, and whether or not youcan be claimed as a dependent; any US Person who earns more than the minimum threshold of around $6K-$10Kdollars in a calendar year is required to file a US income tax return. If you are living and workingabroad, you are still required to file an annual US expat tax return – even if you wind up not owing anytaxes.
In addition to being required to file an annual US expat tax return, you are also required to report anyforeign banking or investment activity if you have an account balance of more than $10K. It’simportant to realize that the $10K threshold applies to all of your accounts combined. For example, ifyou have a foreign checking account with a balance of $5K, a savings account with $4K, and an investmentaccount worth $2K; you will be required to report all of this activity on Form TD F 90-22.1 and mail this form to the United StatesDepartment of Treasury. If you have a vested interest in any foreign corporations, partnerships, ortrusts; you will be required to report this information, as well. If you have earned income from investmentsor interest on your foreign accounts, you must report this income on your US expat tax return.
Consequences for ignoring your tax and reporting obligations
If your foreign income exceeds the minimum filing requirement established by the IRS and you fail to file aUS expat tax return, you will be subject to a number of fines. If you wind up having owed taxes to theUnited States you will be assessed both a Failure to Pay Fee and a Late Payment Fee. Additionally, youwill be charged interest on a daily basis until your US tax obligations are met. If you have not fileda US expat tax return for 1 or more years, we can help get you caught up with minimal fees byfiling back taxes with the IRS.
If you have foreign accounts with a balance of $10K or more and you fail to report this activity to theDepartment of Treasury you will be subject to both a $10K fine and up to 50% of your foreign accountbalances. Additionally, you may have to face criminal evasion charges and potentially serve time infederal prison. If you have failed to submit Form TD F 90-22.1 for 1 or more years, you may beable to escape these hefty penalties by taking advantage of the OVDI (Offshore Voluntary DisclosureInitiative), which allows US Persons with foreign bank accounts to ‘come clean’ on their own accord for aguarantee of no criminal charges and reduced penalties. If you wait until the IRS tracks you down, youwill not qualify for the lenient terms of the OVDI.
How will the IRS know if I’m earning foreign income or have foreign accounts?
The IRS is continuously seeking new methods of identifying US taxpayers who have not met their US taxfiling and reporting obligations in previous years. Not only has the IRS begun to hire moreinternational employees to track down US tax evaders, it has also gone to greater lengths holding foreigninstitutions responsible for not reporting the income or banking activity of US Persons. Additionally,the United States has more than 40 active treaties with other countries in which there is an agreement toshare all tax related information. For US Persons ignoring their US tax obligations, it’s not a matterof IF the IRS will catch up to you; it’s a matter of WHEN. If you are proactive and become compliantbefore the IRS tracks you down, you have a much better chance of escaping punitive charges.
Because of all the different circ*mstances of US Persons living and working abroad, filing a US expat taxreturn can get quite complicated. At Taxes for Expats, we have expat tax professionalsavailable to answer your questions and/or file a US expat tax return on your behalf.
