Americans living and working abroad often have questions about their tax responsibilities. The fact is there's a lot of confusion when it comes to making a living outside of the United States, thanks in no small part to tax policy changes and increasingly aggressive tactics to curb tax evasion. The IRS has become ever watchful of foreign accounts being used as to hide money for the purposes of evading taxes.
Anyone residing overseas who's not trying to mastermind the tax crime of the century, though, is often in for a rude awakening when they fail to meet basic tax obligations. There are some key issues to prevent when preparing tax returns, as well as potential red flags that the IRS is watching the horizon for. While it's always a good idea to confirm changes in ever-shifting U.S. tax policies, there are a few common rules of thumb that frequently get overlooked.
Those Americans whose families are from other places in the world and have bank accounts in those countries must consider how this money affects their taxes. In recent years, the IRS has started to carefully watch citizens' foreign accounts. Should the government discover undeclared funds, the penalties can be severe.
There's a great deal of misinformation when it comes to filing requirements for those living and working in foreign lands. Americans who are earning foreign income that is less than or equal to $95,100 annually are entitled to an exemption, preventing them from being subject to U.S. income tax (provided they were outside the United States for a total of 330 calendar days). However, regardless of what an individual earns in a year, he or she is still required to file his or her tax return. This is even true of expatriates who become citizens of other countries; they're required to file for 10 years after renouncing U.S. citizenship.
Americans who fail to report income in foreign pension plans can be met with strict penalties, even those who simply make a mistake in filing. Additionally, with the inherent complications brought on from citizens living abroad but banking in the U.S., many find their financial institutions electing to avoid stringent reporting responsibilities by closing their accounts. Adding insult to injury, these same Americans may find it difficult to open foreign accounts for the same reason.
Even for the financially nimble, a tax debt is sometimes unavoidable. The complex nature of reporting while residing in other parts of the world lends itself to errors and omissions. Anyone who finds themselves with a tax liability is strongly advised to talk with a licensed tax professional. Resolving an IRS issue can be relatively painless, provided an experienced professional is able to lead the charge.