From the Tax Law Offices of David W. Klasing - Understanding Tax Obligations for U.S. Citizens Living Abroad

IRVINE, Calif., May 29, 2024 /PRNewswire/ -- Living abroad does not let Americans off the hook for U.S. taxes. As a matter of fact, it adds a whole host of additional foreign information reporting requirements that can lead to draconian penalties for even nonintentional noncompliance and criminal exposure for intentional noncompliance.  Citizens living abroad still need to follow the rules and file tax and foreign information returns.

However, getting knowledgeable help from the Internal Revenue Service (IRS) when you are living overseas can be highly challenging. The IRS has established case law that holds they are not responsible for their own negligence, and thus you cannot sue them if relying on their advice damages you. Therefore, support from our legal & accounting team is crucial when seeking to ensure compliance with U.S. tax and foreign information reporting laws while living abroad.

If you need help understanding your tax and foreign information reporting obligations while living abroad, contact our Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295 or clicking here to schedule a reduced rate initial consultation.

Navigating U.S. Tax Laws Abroad: What Expats Need to Know

Living abroad does not exempt U.S. citizens and residents from their tax and foreign information reporting obligations. Even if you did not set foot in the country last year, you may still be required to comply with U.S. tax laws and fulfill filing obligations. This situation can be particularly surprising for those who were born in the U.S. but have spent minimal time there or for individuals born outside the U.S. to a U.S. citizen parent, as these parties might not even realize they have U.S. tax and foreign information reporting responsibilities.

The good news here is that if you have spent at least 330 offshore in the previous three tax years you may qualify for a zero-penalty expat offshore voluntary disclosure. With the benefit of the foreign earned income exclusion and foreign tax credit, the vast majority of our numerous clients that we have successfully taken through this program have not owed much if anything in the way of federal tax, penalties or interest.

Determining U.S. Citizenship and Residency

Whether you were born within or outside the United States, certain criteria define your status as a U.S. citizen or resident for tax purposes. Being aware of these criteria is crucial, as they determine your filing obligations. U.S. citizenship extends to individuals born in the country, regardless of their parents' tax or immigration status. Additionally, those born outside the U.S. may also be considered citizens if one of their parents is a U.S. citizen. Once citizenship is established, or a Green Card secured, it remains unless formally renounced or lost.

Taxation of U.S. Citizens and Residents Abroad

Unlike many other countries, the U.S. taxes its citizens and residents on their worldwide income, irrespective of where they reside. This means that even if you live and work abroad, you must file a U.S. income tax return, reporting all income, including that earned from foreign sources. However, certain benefits that reduce / eliminate double taxation may be available, such as excluding certain overseas income, deducting foreign housing expenses, and claiming the foreign tax credit for certain income taxes paid to another country.

Limited Access to IRS Assistance

Seeking assistance from the IRS when residing abroad poses challenges. In-person assistance is not available outside of Puerto Rico, and free return preparation programs like VITA and TCE are generally inaccessible. While there's a dedicated telephone line for international taxpayers, it's not toll-free, and accessing online accounts may require extra verification steps, particularly for individuals without a U.S. phone number or mailing address.

Navigating Complex Tax Laws

In conclusion, understanding and complying with U.S. tax laws can be challenging, especially for those living abroad. Additional complexities arise from intricate rules for taxing income earned outside the U.S. If you need help understanding your tax obligations while living abroad, our Dual-Licensed Tax Lawyers & CPAs can provide you with thorough guidance and support.

Potential Consequences of Failing to Pay U.S. Taxes While Living Abroad

There are many harmful consequences you may face for failing to fulfill your U.S. tax obligations while living abroad. These consequences include but are not limited to the following:

Legal Consequences

Failing to pay taxes while living abroad can have serious legal repercussions, including potential criminal tax and foreign information reporting charges and imprisonment. The IRS has the authority to pursue legal action against individuals who deliberately evade their tax and foreign information reporting obligations, regardless of their location.

Financial Penalties

Individuals who fail to pay taxes and file the required foreign information reporting while living abroad may face hefty fines and penalties. These penalties can accumulate over time, leading to significant financial strain and potential asset seizure by the IRS.

Impact on Immigration Status

Non-compliance with U.S. tax laws while residing abroad could impact an individual's immigration status. Some visa categories and residency permits may require adherence to tax laws as a condition of maintaining legal status in a foreign country.

Difficulties Obtaining Financial Services

Failure to comply with U.S. tax laws may result in difficulties obtaining financial services, such as loans, mortgages, or credit cards, both domestically and internationally. Financial institutions may view non-compliance as a risk factor, leading to denied applications or higher interest rates.

Reputational Damage

Non-payment of U.S. taxes can also result in reputational damage, affecting an individual's credibility and trustworthiness in both personal and professional spheres. This could impact future employment opportunities, business partnerships, and social relationships.

How Does the IRS Catch U.S. Tax Evaders Living Abroad?

The IRS is focused and determined to punish U.S. tax evaders living abroad. There are several ways that perpetrators living overseas may be caught. For instance, the IRS may employ any of the following tactics to uncover tax crimes:

International Information Sharing

The IRS collaborates with foreign governments and financial institutions to exchange information on taxpayers with offshore accounts. This includes the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report information on accounts held by U.S. citizens and residents to the IRS.

Data Analytics and Technology

The IRS utilizes advanced data analytics and technology to identify potential tax evaders living abroad. Automated systems analyze taxpayer information, financial transactions, and other data to detect discrepancies and patterns indicative of tax evasion.

Whistleblower Reports

The IRS encourages individuals with knowledge of tax evasion to report such activities through its whistleblower program. Whistleblowers may receive rewards for providing credible information that leads to the collection of unpaid taxes, penalties, or interest from tax evaders living abroad.

Tax Return Matching

The IRS cross-references tax returns filed by U.S. citizens and residents with information received from foreign tax authorities and financial institutions under FACTA. Discrepancies between reported income and foreign financial accounts can trigger audits and criminal investigations into potential tax evasion.

Focused Enforcement Efforts

The IRS conducts targeted enforcement efforts to detect and deter tax evasion among U.S. citizens and residents living abroad. This includes audits, compliance initiatives, and outreach programs designed to educate taxpayers about their obligations and the consequences of non-compliance.

Call Our Legal Team for Help Understanding Your Tax Obligations While Living Abroad

Get support from our Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by calling (800) 681-1295 or clicking here to schedule a reduced rate initial consultation.

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

Note:  As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process.  Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth.   See our Testimonials to see what our clients have to say about us!

We Are Here for You

Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.

In addition to our fully staffed main office in downtown Irvine California,  the Tax Law Offices of David W. Klasing has unstaffed (conference room only) California based satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad, Sacramento. We also have unstaffed (conference room only) satellite offices in Las Vegas Nevada, Salt Lake City Utah, Phoenix Arizona & Albuquerque New Mexico, Austin Texas, Washington DC, Miami Florida and New York New York that solely handle Federal & California Tax issues.  

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Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

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