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Consequences for not filing US income taxes as an American expat

Updated 22 Jun 2020

How does the IRS go about finding you - an American expatriate - when you have not filed your US income taxes and what are the potentially debilitating results? 

Living abroad for most of us is the adventure of a lifetime. We are exposed to so many new experiences and our senses are constantly invigorated by events that are interesting, delightful and unexpected. For most, it is the stuff of dreams. For some unfortunate individuals, though, the dream turns dark quickly when, seemingly from out of nowhere, they find they are ‘out of compliance’ with the Internal Revenue Service back in the United States because they have not remained current with the legally required filing of their US income taxes.

Why does the United States bother spending time and resources going after tax-delinquents? In short, because it’s worth it. Every year the US spends around 5 billion USD in enforcement activity, including discovery, auditing, collections and prosecutions that yields 55 billion USD in additional tax revenue. Clearly it is in their financial best interest to do so and it’s about to get a lot easier for the US government to find, assess and prosecute Americans living abroad who are behind on filing their US income taxes. 

There are laws that give the United States a crystal-clear picture of those Americans living abroad who aren't filing, what they’re worth and where they reside. The days of living ‘off the grid’ are waning and a new era of finely focused enforcement is upon us. 

Through FBAR (Foreign Bank Account Report) and FATCA (Foreign Asset Tax Compliance Act) laws now in force, you, and even more notably all foreign financial institutions who hold your accounts, are required to report to the United States government information about your foreign financial assets. The penalty for you or a foreign financial entity’s non-compliance is an automatic 30 percent withholding of all transactions that are routed through the United States (and the vast majority of all the world’s financial transactions go through the US).

The United States has also just entered into data sharing agreements, at the sovereign level – government to government, between five of the largest countries in Europe and the US – with a swarm of additional countries asking to join into the data sharing agreement as well.

So just what happens when you are ‘discovered’ and are determined to be non-compliant by the IRS? How does one, as an individual, find out? 

For most, it comes as a shock and a horrible surprise. You might be at the ATM in the foreign country where you reside to withdraw funds and discover, inexplicably, that your accounts have been frozen. Another possibility is that it could be an unexpected letter from your bank, saying that your account is locked and your assets have been seized by the IRS. It could also be a letter from the IRS itself notifying you that you have been assessed for X number of dollars (and the sum is usually large to get your attention) and that you need to file X years’ back taxes in order to become compliant. They’ll give you a number you can call and a case number and thus the seemingly endless nightmare begins.

Following are the potential consequences for not filing US income taxes as an American expatriate:

  • The loss of one’s passport which can be arbitrarily revoked or a renewal denied.

  • The loss of tax refunds that were owed to you by the IRS but never claimed.

  • Loss of the ability to claim the Foreign Earned Income Exclusion.

  • If one had been regularly filing their US expat taxes, the IRS statute of limitations to audit one’s taxes is three years. For non-filers, though, there is no limitation and the IRS will require you to file taxes for as many years as they choose.

  • When one does not file their US income taxes, the IRS ‘files’ for that person. For all the years they deem one was non-compliant they will make their own calculation, based on available data from one’s financial accounts, etc., and assess that person for an amount that is usually heavily tilted in the IRS’s favour.

  • When the IRS ‘files for you’, the assessed amount does not include any deductions or write-offs. The IRS will also calculate their assessment as married filing separately, which is most often higher than married filing jointly.

  • Penalties and interest accrue until the tax debt is paid in full.

  • Liens are placed on any physical assets owned, such as one’s house, cars, etc.

  • Freezing and seizure of financial accounts – often without warning or prior notice.

  • Garnishment of wages from one’s employer – your earned wages can be withheld to contribute toward your obligation to the US government.

  • Automatic imposition of 30 percent withholding on transfers between financial institutions (FBAR).

  • Should one need to file bankruptcy, IRS-assessed taxes are non-dischargeable. They never go away. In a normal bankruptcy, personal tax obligations are forgiven.

  • Jail or imprisonment – although not too often, imprisonment is an all too real potential outcome. It does happen and most often to higher profile individuals or those who outright refuse to comply with IRS laws.

  • Impending legal fees and tax accounting fees. International tax attorneys typically charge over 200 USD per hour and if the IRS mandates that one files eight years of returns, for example, the potential legal fees alone could be debilitating.

  • Personal loss – of both time and emotional energy spent attempting to remedy one’s unexpected predicament and to repair all the ensuing collateral damage. 

For as much as technology has changed our lives and our ability to live so effortlessly abroad, so too the United States government has taken advantage of technology and, along with new and ever-expanding data sharing among countries, the question for those who are not current in the filing of their US income taxes is not if the US government will catch up with them – these days it’s becoming more and more a virtual certainty and the window of opportunity for becoming compliant is closing rapidly.

The best advice, as an American living abroad, is to file your US income taxes. It is imperative that you do so correctly and to do it on time. With the use of the Internet and advanced Web 2.0 cloud technology, filing one’s US income tax return today is surprisingly simple and reliable. There are online US expat tax preparation firms who specialise in taxes for Americans living abroad so finding help is actually quite easy.

With the time invested to stay current with the filing of one’s US income taxes, the dividends one gains in peace of mind - without constant worry and wonder about if or when one will be discovered by the IRS, is hard to put a price on – in actual fact, it’s invaluable.

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