U.S. TAXES TIME LIMITS

LATE & PAST DUE RETURNS 

U.S. expats who have not been keeping current with their U.S. tax obligations for one reason or another are often quite surprised to learn that they owe little or no taxes, interest or penalties when their unfiled returns are finally prepared. Some are even more surprised to find they are entitled to tax refunds. Typically these expats are not aware of the tax rules that operate to their benefit and are only vaguely aware of their U.S. tax obligations.

The rules are very clear. All U.S. citizens regardless of where they reside are required to file an annual U.S. Income Tax Return and report their world-wide income, unless their income from all sources is below the minimum filing requirement. And the filing requirement applies even if earned income is below the foreign earned income exclusion of $91,500. 

Late filing a U.S. Tax Return for any year can be expensive. If tax is due the penalties and interest can be costly. These Americans may still be able to correct their situation currently, and even recover a refund, without paying any tax, penalties or interest. There are no penalties for failure to file a return if there is no tax due or you are owed a refund but you lose the refund unless you file a return. Read on.

Returns filed after the due date (including extensions) are subject to a late filing penalty of 5% per month or part of a month unless you can show reasonable cause. Thus a day late results in a 5% penalty. The maximum late filing penalty is 25%. 

In addition to interest there is a late payment penalty of ½ of 1% for each month or part of a month that tax is paid after the original due date of April 15, not exceeding 25% of any tax due.

The foregoing rules can be harsh. But the biggest penalty of all is the possibility of losing the right to exclude foreign earned income on returns more than one year past due. This right is an election which may be claimed on delinquent returns ONLY if:

You  owe no income tax, or are entitled to a refund, after taking into account the  exclusion, and you file Form 1040 with Form 2555 attached before or after the IRS discovers that you did not file a tax return; or

You owe income tax after taking into account the exclusion, and you file Form 1040 with Form 2555 attached before the IRS discovers that you did not file a tax return  and elect the exclusion on a Form 2555. If  you have not filed past year's tax returns and you do not qualify under either of the above 2 exceptions, there is a 3rd alternative. Any tax due may be reduced or eliminated by any foreign tax you have paid. And only any remaining tax is subject to interest and penalties. If a past due return results in an overpayment, a refund may be claimed if the return is filed within 3 years from the original due date.

In cases where tax returns have not been filed for a number of years the normal IRS practice is to ask that returns be prepared for the current year and the last 3 years. If these returns reflect only a minor amount of unpaid tax normally the IRS will be satisfied with the filing of these returns. You should anticipate a different reaction if significant tax is due. 

STATUTE OF LIMITATIONS 

The IRS has 3 years from the date a return is filed to audit your return and  make an assessment for any additional tax. Then the IRS has 10 years from the date a tax liability is finalized within which to collect the outstanding tax,  interest and penalties. Note that the Statute of Limitations on audit and  assessment never expires for any year for which you have not filed a tax  return. And, the Statute of Limitations on collections is suspended during the  period for which a taxpayer is resident abroad.

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