1.What happens if you file taxes late?
If you’re a US expat who just discovered your obligation to file US taxes, it’s crucial to understand the consequences of filing your taxes late. While many US expats may not owe taxes due to the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC), there are still significant penalties for failing to file certain informational forms on time.
If you owe taxes and don’t file on time, the IRS imposes a failure-to-file penalty of 5% of the unpaid taxes for each month or part of a month that your return is late, up to 25%.
Additionally, if you owe taxes and don’t pay them by the deadline, the IRS charges a failure-to-pay penalty of 0.5% per month, up to 25% of the unpaid amount, along with interest on the unpaid taxes at an annual rate of 8%.
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2. What happens if you don’t file your taxes but don’t owe anything?
For US expats who discover they haven’t filed their taxes but don’t owe any tax, the consequences are generally less severe than for those who owe money to the IRS. Not owing taxes often results from using the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC), which can reduce your US tax liability to zero. In such cases, you won’t face the failure-to-file penalty, which is typically 5% of the unpaid taxes per month, up to a maximum of 25%. Since there are no unpaid taxes, this penalty does not apply.
For American citizens living abroad, the more significant concern is the failure to file certain informational forms, such as the FBAR (Foreign Bank Account Report), Form 5471 (for Controlled Foreign Corporations), or Form 8938 (for Specified Foreign Financial Assets), etc. These forms carry automatic penalties for late filing, regardless of whether you owe any tax. The penalty for failing to file these informational returns can be as high as $10,000 per form.
Additionally, the statute of limitations for the IRS to audit your return or assess additional taxes generally starts only when you file your return. If you don’t file, the clock doesn’t start, leaving you indefinitely exposed to potential IRS actions.
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3. What are the penalties for filing taxes late?
For US expats, filing taxes late can result in several penalties, especially concerning informational forms. The most common penalty is the failure-to-file penalty, which is 5% of the unpaid taxes for each month the return is late, up to a maximum of 25%.However, many US expats owe no US tax due to the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC), so this penalty might not apply.
Self-employed U.S. Expats need to make estimated tax payments quarterly to avoid penalties. These payments help ensure that you meet your tax obligations throughout the year.
A significant concern for expats is the automatic penalties for not filing informational forms on time. These include:
- Form 3520-A: Annual Information Return of Foreign Trust with a US Owner, which has a $10,000 penalty.
- Form 5471: Information Return of US Persons with Respect to Certain Foreign Corporations, which has a $10,000 penalty.
- Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, which also has a $10,000 penalty.
- Form 8858: Information Return of US Persons with Respect to Foreign Disregarded Entities, which carries a $10,000 penalty.
- Form 8938: Statement of Specified Foreign Financial Assets, which has penalties starting at $10,000 for failure to file.
- FBAR: Report of Foreign Bank and Financial Accounts, with penalties starting at $10,000.
In addition to these penalties, interest on unpaid taxes accrues from the due date until the taxes are paid. Filing your tax return on time, even if you cannot pay in full, is crucial to minimize penalties and interest.
The penalties are often calculated based on the total tax liability, so ensuring that your total tax is accurately reported is essential. For those who discover their filing obligations late, utilizing IRS amnesty programs such as the Streamlined Foreign Offshore Procedures can help mitigate penalties and bring them into compliance.
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4. I didn’t know about my U.S. tax obligations, will I still be fined?
It depends. Tax penalties and fines for US expats are not always imposed as each taxpayer’s situation is different. The IRS is aware that a large portion of Americans abroad does not know about their filing obligations, so it offers preferential treatment to those who seek ways of complying with U.S. tax law. If you didn’t know that you had to file, you could be eligible for the IRS’ amnesty programs.
The Amnesty Program
The Streamlined Procedure is an excellent option for expats who have neglected to file their taxes, offering them a legal way to catch up through an IRS tax amnesty program. “Amnesty” refers to an official pardon, and the expat tax penalty amnesty program grants taxpayers forgiveness for not filing previous tax returns, provided they can certify that their non-compliance was not willful.
Expats who have not filed in years can potentially become compliant through the Streamlined Foreign Offshore program without facing penalties for prior unfiled returns. If you were unaware of the requirement to file, you can take advantage of this amnesty by submitting three years of delinquent tax returns and six years of FBARs. When non-compliance is due to reasonable cause, no tax penalties or fines for U.S. expats are imposed for failure to file, failure to pay, or late FBARs.
Reasonable cause is assessed based on the facts and circ*mstances of each case. The IRS may grant relief if you can demonstrate that you exercised care and prudence in attempting to meet your tax obligations but still failed or if you lacked knowledge of your filing obligations or the requirement to pay taxes to both the U.S. and the country where you reside.
At 1040 Abroad, we encourage our clients to take advantage of the amnesty programs and come into compliance with the IRS, saving themselves the unnecessary stress of possible tax penalties and fines for US expats and enabling them to enjoy their expat life overseas.
In most cases, our clients do not have any tax owing, their tax preparation fees are deductible and the peace of mind they gain is priceless. Contact us now and take advantage of the amnesty programs.
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5. What are willful and non-willful violations?
Non-willful violations occur when you are unaware of your tax obligations and fail to meet them unintentionally. Willful violations, on the other hand, happen when you know about your tax obligations but choose not to comply. Non-willful violations typically result in lower or no penalties, whereas willful violations can lead to more severe consequences.
For instance, if you knew you had to report foreign accounts on FBAR or Form 8938 and intentionally chose not to, it’s considered willful. However, if you were unaware of these requirements and did not report, your actions would be non-willful. Understanding whether your non-compliance is willful or non-willful is crucial for determining your eligibility for the Streamlined Foreign Offshore Program, which allows expats to become compliant without severe penalties.
The IRS defines non-willful conduct as actions due to negligence, inadvertence, or a good faith misunderstanding of the law. It’s important to provide specific reasons supporting your non-willful status when applying for this program.
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6.What are the FATCA/FBAR penalties?
If you fail to file the FBAR (Foreign Bank Account Reporting) or the FATCA Form 8938, you may face significant IRS penalties. For FBAR, if your violation is considered non-willful, the minimum penalty is $10,000 per year for each unfiled FBAR. However, if the IRS determines your violation was due to willful neglect, the penalty can be as high as $100,000 or 50% of the account balance, whichever is greater.
FATCA requires reporting foreign financial assets on Form 8938, separate from the FBAR. Failing to file Form 8938 can result in a $10,000 penalty, with an additional $10,000 added for each month the failure continues, up to a maximum penalty of $50,000. There is also a substantial understatement penalty of 40% on underpayments related to non-disclosed foreign assets.
Both FBAR and FATCA violations affect the statute of limitations, which is six years for FBAR. If you omit more than $5,000 in income related to foreign assets, your tax return may be subject to audit for up to six years. The IRS may offer penalty abatement if you can demonstrate reasonable cause for non-compliance or if extenuating circ*mstances, such as a natural disaster, prevented you from meeting your tax obligations.
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6. Is there a penalty for filing late if you don’t owe?
If you don’t owe any taxes when filing your tax return late, the IRS typically does not impose a failure to file penalty. However, it’s important to ensure that your total tax liability is indeed zero, considering factors such as tax withholding, estimated tax payments, and allowed refundable credits. Even without unpaid taxes, you should file your tax return by the due date to start the statute of limitations and avoid complications with future tax filings.
Although there may be no failure to file penalty if you owe no tax, failing to submit certain informational forms, such as those required under FATCA, can still result in penalties. The IRS may impose a minimum penalty for not filing these forms, even if there is no tax owed.
If you end up owing taxes, you might face a failure to pay penalty of 0.5% per month on the unpaid amount, up to a maximum penalty of 25% of the total tax owed. Interest charges will also accrue on any unpaid tax starting from the original tax deadline.
In situations where you did not file on time due to extenuating circ*mstances, such as a natural disaster or good faith error, you might qualify for penalty abatement if you can demonstrate reasonable cause.
This could help avoid penalties and reduce interest on any tax bill you may face. To fully understand your tax obligations and minimize the risk of penalties, it’s advisable to consult with a tax professional, especially if you expect a tax refund or need assistance with complex tax matters. Contact us today for free tax advice.
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