Tax Duties for U.S. Citizens Abroad

US citizens living abroad or those with dual citizenship are required by law to file US taxes, even if they pay taxes in another country. There are certain benefits provided to US citizens overseas, such as various extensions to file tax returns, but conditions apply.

Tax Filing Requirements

The IRS requires all American citizens to disclose all sources of income and assets. Many American taxpayers living abroad are not aware of this filing requirement. This unknowing may lead to past years' unpaid taxes and the accumulation of penalties and interest. Those living abroad are required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) to report their foreign bank and financial accounts to the IRS. The IRS is particularly attentive to taxpayers' funds overseas because of large-scale tax evasion by taxpayers who hide their income in foreign bank accounts.

If a taxpayer has a financial account in a foreign bank, including bank account(s), investment account(s), mutual fund(s), stock(s), bond(s), brokerage account(s), trust(s) or any other financial accounts, they are required to disclose the details to the IRS on their tax return.

Resolving Past Years' Noncompliance

Those who were not aware of their tax duty or were victims of legal misguidance can use the Offshore Voluntary Disclosure Program (OVDP) to get into compliance with the IRS. Currently, the program is open for all those with undisclosed accounts, but the IRS may choose to stop the program at anytime.

Taxpayers can resolve their past noncompliance and disclose their income and assets without criminal prosecution or heavy penalties. Even though the IRS will still charge civil penalties and interest on past due taxes, taxpayers can escape stricter punishments for tax evasion.

Foreign Account Tax Compliance Act (FATCA)

Along with asking taxpayers to disclose their funds overseas voluntarily to the IRS, under the new FATCA Act, foreign institutions are also required to disclose certain information about financial accounts held by Americans to the IRS. The IRS is looking to enter into an agreement with as many countries as it can under FATCA in an effort to curb tax evasion.

American citizens overseas, those on military duty outside the US, and resident aliens can get a two-month automatic filing extension, an extension to file and pay, or an automatic six-month extension. These extensions are subject to certain conditions. Taxpayers should get professional help before contacting the IRS if they have past years of unpaid taxes to choose the best resolution option available.

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