The US tax reporting system is voluntary: it is up to the taxpayer to voluntarily report his/her income and pay tax. For many overseas US tax payers – such as expatriates – it can be challenging to report their worldwide income on time to the IRS. In addition, many “Accidental Americans” – individuals who hold US citizenship and live outside the US – do not know they have to file a US tax return. So, what happens a return is filed late? What are the penalties? The good news is there are programs to assist the taxpayers!
#1 – When is a return considered late?
The deadline to file your US tax returns is April 15th (if you reside in the US) or June 15th (if you reside overseas). If you cannot file by those deadlines, you can request an extension to October 15th . If you reside overseas, you can request an additional 2 months to December 15th .
To know more about US tax deadlines: https://kbfinancials.biz/tax-calendar/
#2 – You may be assessed financial penalties
The most common financial penalties assessed by the IRS include:
a/ Failure to file / late filing = The IRS assesses a penalty for each month a tax return is late. Overseas taxpayers often fail to file their US tax return because they are unaware of their US tax obligations (Accidental Americans).
To know more on accidental Americans: L’americain accidentel: 3 conseils pour bien gerer sa fiscalite – KBAUER LAW PLLC (kbfinancials.biz)
b/ Failure to pay tax / to pay estimated tax = The IRS assesses a penalty when a tax is paid late. The penalty functions like an interest: it is calculated based on the number of late months.
c/ Failure to report foreign assets = The IRS may assess a penalty for failing to report foreign financial accounts, foreign mutual funds, foreign pension, foreign gift, foreign inheritance or interest in foreign entities.
To know more about reporting foreign accounts: Reporting your foreign accounts in 3 easy steps (Fincen114) – KBAUER LAW PLLC (kbfinancials.biz)
e/ Accuracy related penalty = The IRS assesses this penalty when it determines there has been a substantial understatement of income, negligence, or undisclosed assets.
Summary table of financial penalties
As a reminder, even if you do not have the money to pay your US tax, you should always file your tax return and arrange for payment later. This is because a late filing is penalized more heavily than a late payment.
|Failure to:||Amount of the penalty:|
|File an individual tax return on time (1040/1040NR)||5% of unpaid tax for each month late|
|Pay income tax on an individual tax return||0.5% of unpaid tax for each month late|
|File a business tax return on time (1065)||$210 per month late & per partner|
|Report income (accuracy penalty)||20% of understatement of tax|
|File international tax forms for US ownership in foreign entity (5471)||$10,000 per year|
|File international tax forms for foreign ownership in US entity (5472)||$25,000 per year|
|Report a foreign gift / inheritance (3520)||Greater of $10,000 or 35% of value of gift/inheritance|
|File a foreign bank account return (Fincen114)||Starting at $10,000 per violation|
|File international tax form for foreign ownership in Single member LLC (FDE)||$25,000 per year|
#3- You may lose your tax credits
If you are entitled to a tax refund you must file your return within 3 years from the due date (Statute of Limitation -SOL). If you file outside the SOL, you will likely forfeit your tax refund.
If you live overseas, you can exempt your wages from US tax using the Foreign Earned Income Exclusion. However, if you file your return late, you usually cannot claim this exclusion.
To know more about other exempted income: https://kbfinancials.biz/7-categories-de-revenus-exoneres-dimpot-americain/
#4 – You may be subject to criminal penalties
In some situation, the government might determine that your failure to file was a “willful act” of evading US tax – and may subject you to criminal penalties. To establish a willful act, the government might investigate whether you kept a double set of books, you made false entries or alterations to your books, you falsified documents, you destroyed records, you concealed assets, or you failed to cooperate with tax authorities.
#5 – You may lose your passport
If you fail to file and as a result you owe more than $50,000 to the IRS (includes taxes and penalties), the US treasury may certify your debt to the US State Department. Upon certification, the State Department will no longer issue you a passport or – if a passport was previously issued – may revoke it.
To know more about passport revocation: https://www.irs.gov/businesses/small-businesses-self-employed/revocation-or-denial-of-passport-in-cases-of-certain-unpaid-taxes
#6 – You may be eligible for relief
If you are assessed penalties, you may be eligible for one of the IRS relief programs below:
a/ Statutory relief = the US tax code provides relief for taxpayers in combat zones, taxpayers located in federally declared disaster areas, or taxpayers out on military duty.
To know more about the disaster areas: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
b/ Administrative waiver = The IRS will waive certain penalties for the FIRST year of non-compliance (first time abatement). This program aims at rewarding good behavior and applies to penalties for income tax (1040, 1065, 1120), payroll taxes (940/941) and excise taxes (2290 / 720).
c/ SDOP / SFOP program = If you failed to file and you owe tax on income from foreign assets – due to a non-willful conduct – you can use the Streamline Domestic offshore program (SDOP) if you reside in the US – or the Streamline Foreign offshore program (SDOP) if you reside overseas – to get back in compliance and minimize the penalties.
d/ DIIRSP program = If you failed to file foreign activity (such as Forms 8938, 5471, 5472, 8865, 926, 3520), and you do not owe tax – you may use the Delinquent International Information Return Submission procedure (DIIRSP) to get back in compliance.
To know more about relief: https://www.irs.gov/newsroom/heres-what-taxpayers-should-know-about-penalty-relief
#7 – You may have to show reasonable cause
The IRS may consider “reasonable cause” to waive penalties: ie did you exercise ordinary business care and prudence but yet was unable to comply with his US tax obligations. Reasonable cause factors include:
- The events that prevented you from filing on time were beyond your control
- You do not have a history of repeatedly filing late
- You took prompt action to correct the situation
- Erroneous information from a third party = for example, your accountant or attorney misinformed you on your filing obligations
- Death or serious illness = for example, you or a family member was incapacitated.
- Records unavailable = for example your records were destroyed in a fire, hurricane, flood, or other natural disaster.
Federal laws change frequently and the information in this document may not reflect recent changes in the laws. For current tax or legal advice, please consult with a professional. The information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.
For assistance with your international tax needs, contact Karine Bauer, EA, JD – HERE.
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Updated on Thursday November 9th, 2023