Many U.S. individuals living abroad are either unaware that they have the same tax filing requirements as those living at home, or believe that they do not need to file a return if their foreign income is below the foreign earned income exclusion amount. All U.S. individuals, regardless of the geographical location or the amount of tax liability (even if no tax is owed), must file a return each year.
U.S. expats who are out of the country are usually given extra 2-month automatic extension to file their tax returns without requesting an extension, which makes the due date June 30th of the following year. However, if there is a balance due, interest will be assessed on it starting after April 15th. There is no penalty for being late if you owe no tax.
For those who meet the eligibility requirements (e.g., bona fide residence test and physical presence test), foreign earned income up to $99,200 for tax year 2014 can be excluded from being taxed by the IRS. Although this provides relief from being double-taxed by a foreign country and the US, the exclusion can only be claimed by filing a return with Form 2555. It is important to note that the IRS will not allow the exclusion if the return is not filed in a timely manner.
There is also an additional reporting obligation called “FBAR” for any US citizen or alien residents with a financial bank account if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. If required, FBAR must be electronically filed by June 30th of the following year. Failure to file FBAR is subject to a civil penalty up to $10,000 per violation. A person who willfully fails to report an account may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the highest account balance at the time of violation.
Moreover, all Korean banks and other financial institutions have already begun to comply with the Foreign Account Tax Compliance Act, better known as “FATCA”, effective July 1st, 2014 which requires foreign financial institutions to report directly to the IRS all account information of U.S. clients. This will greatly increase the risk of being caught by the IRS if tax returns and/or FBAR are not filed.
One of the most important decisions you can make regarding your income taxes is whether to get your tax preparation done with the help of a professional, versus trying to go it alone. The most obvious drawback to hiring a tax professional who will personally prepare and file your return is the cost. Although you may think your income structure is simple, the fact that you are an expat makes your taxes complex, as it requires you to file extra forms such as Form 2555 to claim foreign earned income exclusion, Form 1116 to claim foreign tax credits, FBAR, etc. The price for getting your expat tax returns prepared by a professional may typically range anywhere from $250 to $1,500 or more, depending on the type and number of tax forms you need filed. If your tax situation is relatively complicated, you should expect to pay more for professional tax preparation.
Some of the most significant benefits of hiring professional tax preparation are convenience and accuracy. Think about the hours you could save yourself from trying to read through and understand the IRS’s form instructions, publications, and news releases. Despite your best efforts and honesty, you may forget something or make an innocent mistakes. You may have to get assistance from a tax professional to resolve such errors and end up costing more with filing amendments.
There are several things you should consider when employing the services of a tax professional. For one thing, you don’t wait until the last minute to schedule an appointment. The best accountants in your area will likely have waiting lists that fill up quickly during the peak season. You will not have many options regarding professional tax preparation if you attempt to contact someone a few days before your return is due.