A small chance of a disastrous outcome
(this blog post is for entertainment purposes only. I am not a tax professional, nor a lawyer, nor an IRS employee. I don’t know you. I am not even American! You are completely responsible for your choices and decisions)
I often talk to Americans about personal finance, and a surprising number of them tell me they are not filing their US tax returns.
When someone says this I feel a duty to remind them that they are required to file a tax return (and for the last few years, an FBAR if they have more than $10,000 in foreign financial accounts) every year.
But I didn’t have a good idea of how risky this behaviour was. What are the possible penalties? What is the chance of being caught? How likely is it that you will be punished?
Looking online was not very helpful.
Pretty much all the online sources I could find were either government ones, or tax professionals who seemed to be trawling for business by making ominous claims.
Of course I didn’t find anyone posting that they were not filing their taxes and were happily getting away with it.
But I didn’t find anyone talking about how they had been caught and penalised by the IRS either. Hmmm.
Eventually I gave up on searching online and went right to the source.
Reddit.
For any non-Americans, or for Americans who don’t understand their own tax laws and regulations, the US taxes its citizens on the basis of nationality. Pretty much no other country does this (I think Eritrea might be the other one), but rather tax people on the basis of residence.
The problem for US citizens (and Green Card holders, and the spouses of US citizens filing jointly, and anyone else who is required to do an IRS tax return) is that US tax law is designed to deal with people living in the US.
Once people leave the US and become subject to the tax law of the country they are living in AS WELL as US tax law, things start to break because the two tax systems are not designed to work with each other simultanously.
This causes all sorts of problems for Americans living abroad and can result in them not being able to use tax-advantaged accounts, invest, or even open bank accounts.
They are also required to file a tax return with the IRS each year, and to submit FBAR paperwork. There are provisions so that you don’t have to pay US taxes on some or all of your foreign income, but you need to file to use them.
So what did Reddit have to say?
Plenty.
First I posted a question in the excellent r/JapanFinance group. I got a bunch of answers there, and someone told me about r/USExpatTaxes so I posted there as well.
I recommend reading both of those threads, they are very interesting and provide a huge amount of context.
Here are my main takeaways: the potential penalties for not filing taxes and particularly the FBAR declaration are severe, but it does not seem very likely that people living abroad will be subject to them.
First let’s look at the penalties:
- if you do not file FBAR the fines are $10,000 for non-willful or $100,000 dollars (or up to half the money in your accounts!) for willful violations
- if you do not file your tax return, you may have to pay late fees and interest on the late taxes, as well as penalties
- you may have your US assets seized, and possibly assets abroad if you are not a citizen of the country you are living in and that country has an agreement with the US (apparently Japan is currently negotiating an agreement but it is not in place yet)
- you may not be allowed to renew your passport
But how likely are you to run into these penalties?
- apparently up to 70% of US citizens abroad are not filing
- if you are not filing the IRS does not have any information to go on to pursue a claim against you
- non famous non wealthy people are likely not going to be of interest if living abroad
- if you return to the US to live, try to renounce US citizenship, or start filing tax returns you may then come to the attention of the IRS
There are also some programs designed to help people start filing again if they have not been doing so, like the Streamlined Filing Compliance Procedures. This allows you to ‘clear the slate’ by just filing just a few years of returns, but you can only use it if you go to the IRS voluntarily. You can’t use it once they start investigating you.
Well, I am very glad I am not a US citizen, and that the UK does not tax its citizens on the basis of nationality.
If you are a US citizen, there are a number of pressure groups and organizations working to try to change the US tax laws for citizens living abroad. I would recommend joining one or more of these groups.
I hope you enjoyed this entertaining and non-advisory blog post. I certainly learned a lot by researching and writing it.
How about you? Do you know any US citizens who, due to not filing their taxes while living abroad, were investigated and penalised by the US government while they were abroad?
I didn’t file taxes for something like 15yrs in Japan, but then when I went to renew my passport (in person) there was this warning sign or maybe something on the application that basically said that if you have not filed taxes your renewal may be denied. So, I went to a tax guy and went through the streamlined filing procedure and got caught up and in line without paying anything more than the tax preparers fees. The US has taken it’s share of investment taxes since then however…
A quick search online brought up this similar helpful guidance: https://hodgen.com/renewing-your-passport-when-you-didnt-file-income-tax/
Thanks for the information Ben. I am an American working at a Japanese company. Last year was my first year in Japan. I am currently trying to figure out how to file taxes. I will probably work here for another three years and then return to the U.S. So, I need to make sure my taxes are kept up. Any advice from those who have a similar situation would be helpful.
One other thing of note, I believe the COVID stimulus payments went through the IRS. There was some language that didn’t link them specifically to those who filed, but if the IRS didn’t have an address or bank account on file it took longer to get the payments. Odds are any future stimulus/UBI/tax credit will also go through the IRS, so it’s a good idea to stay up-to-date with them.
There are many tax companies that work with American’s living abroad and I would HIGHLY recommend working with one. I have used this company for the last few years…
https://www.hrblock.com/expat-tax-preparation/
and before that I used… this one
https://www.expatriatetaxreturns.com/
both were good and depending on what you are looking for can really help you out.
Ryan
Work with a dude in Japan who said he was never going back to the US to live so he didn`t care about filing. The problem for people like that is governments including the US one are desperate for revenue and yep, they do go after the little guys and gals meaning people with an ordinary salary, when they want to. The way govts everywhere do their business now is that things are getting tighter, not easier for the average person.
The celebrities get all the news when they are hounded for tax evasion but govts have no problem with going after your average earner and not even average – just earn a salary and you`re vulnerable.
States like California are actually broke and trying to nickel and dime salary earners so that`s why there`s been an outflux of Californians to other states. That`s one of the outcomes of declaring yourself a `sanctuary city` – inviting people who aren`t in the US legally to come and get the fruits of taxpayers who are. Dude I mentioned comes from California and I believe he is still obliged to pay state tax there.
The US will do what it does for deadbeat dads in the not far off future – not issue passports for those who have skipped out on filing for as long as they felt like it. And all those global tax treaties mean one thing whether people want to believe it or not – they open the door for serious information sharing about what foreign residents are earning and doing. Funny thing is the dude I mention here is also in trouble with J city halls on an ongoing basis – always pays late the nenkin, kokumin kenko hoken and juminzei late and until this year was being chased by his old city halls back in Kyushu. But thinks he`s going to get PR…..