If you’re an American living outside the US, you may not be aware that you’re required to file a US tax return each year. While US expats receive an automatic two-month extension to file, what happens if the due date rolls around and you miss it?
Not paying your taxes is a habit you don’t want to fall into. The IRS can charge hefty penalties if it believes you haven’t paid your fair share of taxes. But, what if you didn’t know you owed taxes or didn’t realize when they were due?
In this case, two tax amnesty programs are available for you to take advantage of– one of them to avoid tax penalties. These programs help US expats catch up on past due tax returns, as long as you’re acting in good faith and haven’t knowingly been avoiding your responsibility to file your taxes.
Here’s everything you need to know about filing after the tax deadline.
When was the US expat tax filing deadline?
This year’s tax filing deadline landed on June 15th, 2022. US taxes were technically due on April 18th this year, but US expats always receive an additional two-month extension to file. Keep in mind, this extension only applies to filing your tax return – if you owe taxes, you were still expected to pay by April 18th, although only interest (no penalties) accrues between April 18th and June 15th.
What about an extension? Can I still get one?
US expats can request tax extensions before the official filing deadline, June 15th. Unfortunately, once this deadline passes, you’re no longer able to request one. You could send a letter to the IRS, asking for more time to file and explaining any extenuating circumstances – but there’s no guarantee they’ll grant your request.
You missed the tax filing deadline. Now what?
Since we’re now beyond June 15th, the 2021 tax filing deadline for US expats is officially in the past. But that doesn’t mean you can’t still file. You can submit your tax returns after the due date – but you’ll have to pay penalties and interest on any taxes you owe the IRS. Basically, filing late makes it a little more expensive for US expats who have tax bills.
The sooner you file, the better. There are two major penalties to expect when filing US tax returns late – the failure to file penalty and the failure to pay penalty.
Failure to file penalty
The failure to file penalty kicks in when you file the tax return late with the IRS. This penalty adds 5% onto your tax bill for every month (or part of a month) that your tax return is late.
So, if you file on July 15th, for example, and you owe the IRS $1,000, the 5% penalty adds $50 on to your tax bill. However, if you were to file in September, three months after the tax deadline, your penalty would be $150.
A cap is set on failure to file penalties. The IRS cannot charge more than 25% of your tax bill. So, looking at the above example, the maximum the fine could be is $250. As you can see, filing soon, and ideally on time, can save you hundreds or even thousands of dollars, depending on the size of your tax bill.
Failure to pay penalty
The failure to pay penalty also adds money onto your tax bill if you file and pay late. Working like the failure to file penalty, it adds 0.5% onto your tax bill for each month your payment is late. This penalty won’t apply to you if your tax bill is $0 or you are due a refund.
If you pay and file your taxes late, the combined penalty for failure to pay and file is 5% each month your taxes are late. This breaks down to 4.5% for filing late and 0.5% for paying late. This will max out at 47.5% of your tax bill (22.5% for filing late and 25% for paying late).
A Bright!Tax CPA can help you understand any late fees you may owe when filing or paying late. We’ll work with you and do what it takes to make sure you don’t pay more than you have to.
Can I avoid penalties and still file late?
In some cases, yes. US expats have the opportunity to file late returns without worrying about late fees and other penalties using specific procedures designed for American taxpayers outside the US. Since many US expats don’t know they’re on the hook for filing taxes, the IRS offers two ways to make filing a little easier for them: the Streamlined Procedure and the first-time penalty abatement. The Streamlined Procedure is designed to help expats catch up on past-due tax returns, while the first-time penalty abatement can help all US taxpayers avoid late fees.
Here’s how the Streamlined Procedure works
US expats who are behind on filing tax returns can use the Streamlined Filing Compliance Procedure. Through this process, you can file three years of missed returns, penalty-free. This means that even if you end up owing the US money in taxes, late filing and payment fees won’t increase your tax bill.
To qualify, you need to meet these key qualifications:
- – You must sign Form 14653 certifying that your failure to file on time was non-willful. This confirms that you did not file in the past for example, because you were unaware you had to file as an expat or were unaware of the deadline. (A range of different circumstances may qualify as non-willful conduct).
- – You should verify you were outside of the US for 330 days during the filing years for which you’re requesting amnesty. So, if you were living outside of the US in 2021 and only returned for two weeks, you can use the Streamlined Procedure for your 2021 2020 & 2019 taxes.
To complete this process, you’ll need your worldwide tax documents (such as your foreign tax returns, 1099s from companies you worked for) from the previous three years.
Note: If you have foreign bank accounts and your aggregate balance was over $10,000, you also need to complete the FBAR (Report of Foreign Bank and Financial Accounts). Unlike your tax returns, the FBARs are due on October 15th. If you meet the threshold, you’ll need to file any past FBARs for the previous six years as part of the Streamlined Procedure.
Bright!Tax has successfully guided thousands of US expats through the Streamlined Procedure to help them catch up on past-due taxes while decreasing their tax bills. Our CPAs have the experience to evaluate your situation and determine whether you qualify for the stress-free Streamlined Procedure.
Here’s how the first-time penalty abatement works
Maybe this is your first year traveling as a digital nomad. Or maybe you just lost track of time and realized you missed the tax filing deadline, but have always been on the right side of the IRS in the past. Whatever the reason, if this is the first time you have not filed your taxes on time and you’re surprised by penalties, you could qualify for one-time tax relief through the IRS’s First-Time Penalty Abatement program.
To qualify, you need to file your taxes and pay the amount due before requesting this relief – otherwise you may not meet the qualifications, which are:
- – You did not have to previously file a return or you do not have tax penalties for the past three filing years
- – You’ve filed all required tax forms or received an extension from the IRS
- – You have already paid any taxes due or planned for their repayment through an installment plan
Have questions? Bright!Tax can walk you through the first-time penalty abatement program to make sure you apply correctly and have the best shot at receiving relief from late penalties.
Can I still claim credits and deductions when filing late?
Yes, you can still claim any tax breaks you may be eligible for when filing late or through the Streamlined Procedure. For US expats, common credits to consider are the FTC (Foreign Tax Credit) and the FEIE (Foreign Earned Income Exclusion).
Each of these tax breaks works a little differently and in some cases, you may even be able to use both of them on different income sources. But, both can help minimize your tax burden, and in some cases boost your refund – even if you haven’t paid US tax during the year.
Bright!Tax can work with you to help you determine which credits are right for you so you can reduce your tax bill, even if you file late.
What if I can’t pay my taxes right now?
If you haven’t filed your taxes because you’re worried you can’t foot the bill, we recommend talking to a Bright!Tax CPA. You may be eligible for more tax credits or deductions than you realize and we can find the right tax breaks for your individual situation.
If you do end up owing the IRS taxes and you cannot afford to pay them all at once, you can apply for an installment plan with the IRS. This can split your tax payments into more manageable chunks to be paid throughout the year. This option is often cheaper than putting your tax payment on a credit card – even if the IRS charges you interest and penalties. That’s because the IRS’s penalties are generally much lower than credit card interest rates.
Bright!Tax can also work with you to find the right installment plan to apply for and answer any questions you may have about the process.
Next steps to take to correctly file your taxes
Life happens and sometimes deadlines slip by. If you missed the 2021 tax filing deadline, Bright!Tax can help you get back on track. We’ll do whatever is necessary to determine if you qualify for any of the IRS programs designed to assist expats with filing taxes penalty-free. If you do qualify, we’ll guide you through the program’s filing process.
If you don’t qualify and you do end up owing penalties, we can calculate your total penalties and help you determine the most favourable deductions and credits to lower your tax bill.