Filing and Paying Taxes for U.S. Citizens or Residents Living Abroad
I previously described the dizzying tax compliance challenges encountered by U.S. citizens and residents living abroad. Now, I will describe the basics of filing and paying U.S. taxes for U.S. citizens and residents living abroad.
Who Must File
The United States taxes its citizens and residents on worldwide income, regardless of where they live. This means that a U.S. citizen or resident must file a U.S. income tax return reporting all income, even if the individual lives and works in a foreign country. This is the case even if the U.S. citizen or resident doesn’t have any income from a source within the United States.
Read my previous blog about tax compliance challenges for a more in-depth discussion of who qualifies as a “U.S. citizen or resident,” including so-called “accidental Americans” – individuals who are considered U.S. citizens, sometimes without realizing it.
When to File
You are allowed an automatic 2-month extension of time to file your income tax return and pay income tax if you are a U.S. citizen or resident, and on the regular due date of your return 1) you are living outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States or Puerto Rico, or 2) you are on military or naval service outside the United States and Puerto Rico. This means that if you meet the criteria, and your return is normally due on April 15, 2024, you are allowed until June 17, 2024 (since June 15 is a Saturday) to file. To take advantage of the automatic two-month extension, you must attach a statement to your return explaining which of the two situations apply to you. Note that you still must pay interest on any tax not paid by the regular due date of your return even if you qualify for the extension.
You can also file Form 4868 to request an automatic six-month extension of time to file your return. This six-month extension runs concurrently with the automatic two-month extension. Therefore, if you qualify for the automatic two-month extension, you will only receive an additional four months for a total of six months. To qualify for the six-month extension, you can either file the request by the original due date of your return or, if you qualify for the automatic two-month extension, by the extended due date. You also may be able to request an additional two-month extension to December 15, which is discretionary and must be approved by the IRS. These extensions are not an extension of time to pay your tax. Therefore, you owe interest on any unpaid tax and may owe penalties.
There is one other extension that might be available. If you expect to meet the residency tests to qualify for the foreign earned income exclusion or the foreign housing exclusion/deduction but not until after your return is due, you may qualify for an extension that is generally 30 days beyond the date on which you can reasonably expect to qualify.
How to File
You always have the option to mail your return to the IRS. A tax return mailed from a foreign country will be accepted as timely filed if it bears an official postmark dated on or before midnight of the due date, including any extension of time for such filing. If you choose to use a private delivery service, you must similarly give your return to a designated international private delivery service before midnight on the due date, including any extensions of time.
Your ability to file a return electronically will depend on the form and other circumstances. For example, if you are applying for an Individual Taxpayer Identification Number (ITIN), which is used by individuals who do not have and are not eligible for SSNs, your return accompanying the ITIN application must be filed on paper. Some other forms, including international information returns, must also be filed on paper. Your ability to use the Free File program, where taxpayers file their returns for free via certain software providers, will depend on the software provider and the form you are filing. This filing season, the IRS is implementing a Direct File pilot program, which will allow taxpayers to file for free directly with the IRS, but it is not available to taxpayers abroad.
If you file your return electronically, be aware that it will need to be e-filed through an electronic return transmitter before midnight of the due date, including any extensions of time, to be considered timely. An electronic return transmitter is a preparer, software, or platform that has received approval to submit returns electronically to the IRS on behalf of taxpayers. Further, if the IRS rejects an e-filed tax return before processing, it will not be considered timely filed if it is subsequently accepted after the filing deadline. This can cause challenges for taxpayers who file at or near the due date for their return. Since there is a disparity in the IRS’s treatment of paper-filed and e-filed returns and other documents that results in incongruous and inequitable results, I have recommended to Congress that it amend the law to treat electronically submitted tax payments and documents as timely if they are submitted on or before the applicable deadline.
How to Pay Tax or Receive a Refund
If you live abroad and owe U.S. tax, you can mail a paper check to the IRS or pay with a credit card. Options to make electronic payments are limited. The IRS cannot currently accept e-payments from foreign bank accounts, so you can only make an e-payment through a U.S. financial institution or corresponding bank. Similarly, international wire transfers, which can be expensive, can only be made from certain banks. The good news is that the IRS is planning to allow taxpayers to make payments to the IRS directly from foreign bank accounts in the future.
If you are entitled to a refund, that refund will almost certainly be paid by a paper check that is mailed to you. Currently, the only existing option for international direct deposit of refunds is a manual refund issued through the International Treasury Service, which is only available for refunds over $1,000,000 or for TAS hardship situations.
Be Aware of International Information Reporting Requirements
Separate from your income tax filing obligations, you may have to file an information return if you receive money from abroad (including a non-taxable gift) or have certain foreign financial interests and cross-border business activities. For example, taxpayers with foreign financial accounts exceeding a certain amount must attach Form 8938 to their Form 1040. These reporting requirements surprise many taxpayers living abroad. It is critical that you take steps to determine if you need to file as these requirements come with significant penalty exposure when a filing is late, incomplete, or inaccurate. Many of the forms take significant time and records to prepare and can only be filed on paper. For more information, see the IRS’s website on international information reporting penalties.
Conclusion
U.S. citizens and residents who live abroad are subject to filing requirements, many of which are complicated and some of which taxpayers may not even be aware. Access to IRS assistance is limited, further burdening these taxpayers. I have recommended that the IRS improve services for taxpayers abroad, including providing in-person services, such as Taxpayer Assistance Centers, outside the United States; providing a toll-free international telephone line or other alternative free service; and providing greater accessibility to online accounts to taxpayers abroad who have problems verifying their identity.
This blog provides an overview of information that taxpayers abroad need to know to successfully meet their obligations for this filing season. Of course, there are many other forms, publications, regulations, and statutes that might be applicable to your U.S. tax situation. For more information, a good starting point is Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. If you are a member of the military serving overseas, additional tax preparation resources may be available and there are special provisions which might be relevant, including a deadline extension if serving in a combat zone. For more information, see the TAS webpage on Resources for Military Personnel and Their Families.
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