Like many expats, you may realize that you have not filed a tax return in many years because you were either unable to pay or did not know that you were required to file. Procrastination may have led you to not file the next year, and then the next and so forth. This is a vicious cycle that affects thousands of U.S. expats. The fear of huge tax bills and uncertainty leads to years of unfiled tax returns. The reality is that most expats find that they are not faced with substantial penalties and interest.
You must be advised that the only way to return to good standing with the IRS is to file all tax returns. It is important to realize that the statute of limitations for any refunds is 3 years. So even if you are currently owed a refund, you may not actually receive it.
The first step is to obtain the actual forms for any years that must be filed and collect any financial numbers (rental info, business income, etc) to support your income as well as any eligible deductions (donations, mortgage interest, etc) credits or claims that may reduce any amount that you may owe. When a tax return is not filed, the IRS will at some point create a substitute return that will be based on any information they have on file. But they will not include any deductions, so you will be assessed a substantial liability based solely on any income. Once a return is filed, they will process the new tax return and make any correcting adjustments.
If you have no supporting documents for a given year, all is not lost. You can request a copy of any and all income and expense statements (W2s, 1099s, etc) that they have on file. Also, a CPA or tax professional who works with expatriates and specializes in filing unfiled tax returns will be able obtain a power of attorney and assist you in the process.
If you owe the IRS then they will provide you with a total owed for all years (assuming there is a tax liability). If you can, you can of course pay the amount in full, but you may be able to use one of the following actions:
- Installment Agreement – this is a monthly payment plan normally completed over 7-8 years.
- Offer in Compromise – this is a settlement agreement whereby you will pay a lower amount as payment in full (a lump sum payment).
- Currently Noncollectible – the IRS may determine that you have no ability to pay the tax and they can suspend (even if temporarily) any specific collection action.
The best thing to do is to educate yourself on the process and seek out the assistance of a tax professional. Don’t run from years of unfiled expat tax returns. Develop the necessary strategy to get yourself back on track with the IRS and sleep better at night.