What If I Have Not Filed a US Tax Return for X Number of Years?
Option One – You choose to continue not filing your US taxes.
This is both risky and, by US law, it is a criminal offense. The potential outcome to you personally could be disastrous. Our recommendation is not to consider if you will be discovered, but when you will be discovered. Even if you believe you are effectively ‘off the grid’ the United States is newly and aggressively establishing data sharing agreements with other countries in order to seek out and find tax evaders.
country to country specifically to target potential tax evaders, thus circumventing any country’s existing individual privacy laws. This is brand new territory and the US considers these agreements to be the ‘breakthrough’ that they have so long been seeking to pinpoint exactly who and where American expatriates are and reside.
When the IRS discovers your whereabouts, they will proceed to perform their own calculation and present you with their assessment of what taxes they believe you owe, plus penalties, plus interest for all tax years you have not filed. Then you are drawn into a nightmare scenario of battling the IRS over what you actually owe versus their assessment (and their assessments are most often astronomically high).
This potential outcome can be remedied though.
Option Two – You choose to become current with the IRS and file your US expat taxes.
This is where Bright!Tax can help and probably not as painfully as you might think. A potential strategy that brings you into full good standing with the IRS is this –
The statute of limitations for the IRS’s audit authority for an individual’s returns is 3 years. Anything before that is usually off limits. Important! For individuals who have not filed a return in several years there is no statute of limitations – In other words, you could be discovered and assessed for all of the years that you had not filed your taxes. Whether you actually owed any taxes or not, you would still be exposed to IRS assessments, penalties and interest then battling them over who owes what.
To remedy this, a recommendation we often make to clients is to file the current year’s return. Then, in addition, to file 2 prior years’ returns. The strategy is this – By filing the current year’s return, you’ve created your desired ‘time stamp’ that establishes your 3 year statute of limitations. Then, since filing a single return might kick out a data anomaly, because IRS systems look for 2 years’ prior filings (staying within their 3 year audit window), you decrease the probability you’ll be scrutinized and, by filing a total of 3 years, you are also demonstrating goodwill that you are aware of your obligation and are making a good faith effort to become compliant. This goes a long way toward the government looking at your case favorably or not if, indeed, your returns were to be scrutinized.
Another surprising aspect of this strategy is that, most often, there’s actually no tax owed. Because of Foreign Earned Income Exclusions, etc., our clients, while becoming fully compliant, are also pleasantly surprised to discover they don’t owe any tax whatsoever.
There are other expat tax advisors who suggest filing one year and taking your chances or others who recommend filing the past 6 years. While these are valid approaches, our recommendation, depending on circumstance, is usually to zero in on 3 years’ returns.
Contact us at Bright!Tax and we will gladly and proactively help with your specific circumstance and your becoming fully compliant.