Taxed Twice: will I have to pay a fine?

June 18, 2007 3:26 AM

Is the IRS going to penalise me for filing late from a foreign country?

The United States is the only developed country in the world that taxes its citizens abroad (the only way around this is to renounce one's US citizenship).

I don't owe anything for 2006, because I don't live or work in America, and I earned less than the cutoff amount for exemption. I sent my 1040 and 2555 EZ off today, but it was meant to be in by June 15th.

Americans abroad are allowed an automatic two month extension, but I even let that slip by... mainly because I disagree with the whole idea of anyone having to pay taxes on the same income to two different countries. I have been trying to decide what to do about it, but opted (in the end) to just sign the thing and send it to Texas.

I skyped the IRS to ask about fines, but they were as useless as a screen door on a submarine. The guy was actually reading their FAQ to me over the phone.

Are they going to fine me for being late? Bear in mind (again) that I don't owe them any money at all.

posted by chuckdarwin to law & government (11 comments total)

I thought maybe Belarus also taxed its citizens abroad. Nevermind... we're stuck with this, so might as well deal with it graciously.

Anyway, unless you're really raking it in, the combination of your foreign-earned income exclusion and the tax you pay in your non-US residence will likely exempt you from US tax.

You still have to file the return. That's what it really boils down to. And then there are some issues around tax for assets held in the US (for instance, interest or dividends paid on US bank accounts, capital gains). Basically, you have to pay US tax on US-sourced income, and then the US acts as a backstop if you don't pay a lot of tax abroad.

I don't think you'd be fined if your account was not in arrears, but if you returned, at some point you'd have to make up all those years in arrears. Not an attractive prospect.

I live in the UK and last year not only did I not owe anything, I was entitled to a refund due to family tax credits. Depending on your situation, it may be in your interest to file.
posted by sagwalla at 4:23 AM on June 18, 2007

You haven't been taxed twice, since you don't owe anything. Filing twice is still annoying, and there is the potential of being taxed twice, but only if you make a lot of money and you aren't in a country with a tax treaty with the U.S.

Is the IRS going to penalise me for filing late from a foreign country?

I don't think so, since you don't owe them any money. Make sure you file that TD F 90-22.1 separately by 30 June if you have more than $10,000 in bank accounts abroad. There are big penalties for failure to file.
posted by grouse at 4:26 AM on June 18, 2007

You're fine. The deadline applies only if you owe.

There is no penalty for failure to file a tax return if a refund is due. But by waiting too long to file, you can lose your refund. In order to receive a refund, the return must be filed within 3 years of the due date. If you file a return, and later realize you made an error on the return, the deadline for claiming any refund due is three years after the return was filed, or two years after the tax was paid, whichever expires later.

- IRS.gov FAQ, here
- Previous link to same FAQ page from a tax preparer on AskMe, here
posted by mdonley at 4:56 AM on June 18, 2007

Oh, cool. I won't stress about it next year. I'm going to have have to be very careful that I don't get too close to the cutoff, though: the taxes on ex-pats who do earn more than $83K are exorbitant.
posted by chuckdarwin at 5:01 AM on June 18, 2007

the taxes on ex-pats who do earn more than $83K are exorbitant.

Taxes on expats who earn more than $83K are the same as any other American who earns more than $83K, with the exception that expats can take a dollar-for-dollar credit for foreign taxes paid.

In other words, Americans living abroad only pay US taxes on foreign income if their US tax bill is higher than their foreign tax bill.

In other other words, Americans living abroad only pay US taxes on foreign income if they have high income and live in low-tax countries.

In yet more other words, Americans living abroad would only pay US tax on foreign income if they are actually tax dodgers, or behave in ways difficult to distinguish from tax dodgers.
posted by ROU_Xenophobe at 5:57 AM on June 18, 2007

the taxes on ex-pats who do earn more than $83K are exorbitant.

You can get a credit for any foreign income tax paid on foreign source income (and sometimes U.S. source income depending on country) beyond this amount. If you are paying tax abroad at a higher rate than you would in the U.S., you shouldn't have to pay any additional tax.
posted by grouse at 5:58 AM on June 18, 2007

"the taxes on ex-pats who do earn more than $83K are exorbitant."

It's been a while since I've looked at the underlying numbers, but what it comes down to is how much above this threshold you are. Keep in mind that first chunk of earnings are tax free.

And I'd suggest that you have to look at total burden, as there are other deductions available to ex-pats (e.g., all costs necessary to maintain a residence abroad for the purposes of employment is the first one coming to mind) that don't support this conclusion.

Finally, American ex-pats have access to Off Shore vehicles that are not available to residents of the US. These allow one to defer taxes that otherwise might be taxed directly in the host country, or perhaps in the US.

disclaimer: highly compensated American who has been living & working in London since 1997. You should get professional advise - until last year I used KPMG for both US and UK returns and was rather happy at their results.
posted by Mutant at 7:33 AM on June 18, 2007

These are all great answers; very informative. Thanks.
posted by chuckdarwin at 10:04 AM on June 18, 2007

You're fine. The deadline applies only if you owe.

True... OTOH, this could happen, where the IRS does your return for you and incorrectly decides you them owe money, and then wants it ASAP. Quite a headache.
posted by smackfu at 10:29 AM on June 18, 2007

Also, filing late does put a marker on your SSN# (according to my IRS pal, who works in a department dealing with fines and penalties), so the fact that you delayed your return as a "protest" of sorts may cause them to take a closer look at you in future years. Keep it in mind next time you file, just in case.
posted by Dee Xtrovert at 1:08 PM on June 18, 2007 [1 favorite]

I'll be a good boy next year: a good English boy (I'm going for full citizenship, it's only £38 and an easy exam away).
posted by chuckdarwin at 4:55 PM on June 18, 2007