Expatriation Tax

Product of BKMSH

If you are a US resident or citizen who is staying overseas for more than a year, then you are called an
expatriate. However, this status does not exclude you from your obligation to pay taxes. You are still
required to file your US income tax returns and account for how much you earned while living abroad.
Sadly, not all expats know this fact and they end up not filing.

What Will Happen if You Dont File Your Tax Returns?

If you have not been reporting your foreign income for quite some time now, you should file those
returns. The good news is that based on the 1993 Treasury Decision, you are excluded to file your tax
returns as long as there is no tax liability. On the assumption that you are going to use this excuse, write
on top of Form 1040 "Filed Pursuant to Sec. 1.911-7 (a)(2)(i)(D)."
But if you did owe a tax and the IRS doesn't know it yet, file your tax returns. Just don't forget to write
"Filed Pursuant to Sec. 1.911-7 (a)(2)(i)(D)" on the top of the form.
If it turns out that you cannot pay all your taxes, you can use Form 9465 or the Installment Agreement
Request. This will allow you to pay your taxes in installments. If a penalty was incurred, you can have
the IRS drop it under special circumstances like loss of your financial records or a death in the family.
In the event that you haven't filed your tax returns and the IRS knows it, you can ask for a Private Letter
Ruling which will allow you to be excused to file your tax returns on time. However, you have to provide
the IRS with a good reason. Also, you will be required to pay a fee of $500 if your income is less than
$150,000, and $2,500 if it is more than $150,000. On the brighter side, there are special tax provisions
that will reduce the expatriates' tax liability while overseas. These are the Foreign Tax Credit and
Exclusions from Income.

Using the Foreign Tax Credit

The Foreign Tax Credit will help compensate the taxes you were obliged to pay while on foreign soil. It
works by using the foreign tax as a direct credit against your tax obligation in the US. This tax credit is
ideal for those US expats who earn a lot in a country where the tax rates are higher than his or her
home country.
According to the expat tax guide, the foreign tax credit is applicable if it was exacted on your earnings,
you were legally compelled to pay the tax, you paid the foreign tax and did not gain anything from it, and
the country is not sanctioned by the United States. But remember that the foreign tax credit can only be
used for the tax liabilities that are relevant to your foreign income.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

Using the Foreign Earned Income Tax Exclusion (FEIE)

Expatriates have the opportunity to exclude two items from their tax returns: foreign income worth
$95,100 or less, and foreign housing costs limited to 30% of the maximum FEIE. However, expatriates
can only claim this exclusion if the source of income is a result of a work or service carried out in a
foreign country, the location of the business or employment is in a foreign country, and he/she passed
the bona fide residence test or the physical presence test.
If an expatriate has lived in a foreign country all throughout one calendar year, then he or she has
passed the bona fide residence test. Otherwise, the person must be outside the US for 330 consecutive
days to be able to achieve the requirement for the physical presence test.

Programs for Expatriates to Catch-Up on Their Tax Reporting

Responsibilities
According to the expat tax guide, the IRS proposes two programs for those US expatriates who are
seen as irresponsible when it comes to filing their tax returns.

Streamlined Filing Program

The IRS acknowledges that many expats are unaware of their responsibility to file their income tax
returns even if they reside outside the country. Streamlined Filing Program will help these expatriates
catch-up with their obligations to prevent penalties from being incurred.
To qualify, the expat must have lived outside the US since January 1, 2009; must not have fulfilled
his/her obligation to file his/her tax return; and must show that the failure to file the tax returns was nonwillful.

Offshore Voluntary Disclose Program

Through this program, expats who have undisclosed income from offshore financial accounts will have
the chance to update their tax returns. However, the process will require significant paperwork and high
penalties. On the brighter side, he/she can avoid criminal prosecution.

Quiet Disclosure
Using this approach, expats can file their tax returns without having to use the two programs proposed
by the IRS. Since the statute of limitations covers three years of tax returns, a few taxpayers are
choosing this approach. However, the IRS warns taxpayers who opt for this method to be wary of the
risks involved. The worst case scenario is that they will be criminally prosecuted.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com