In this article we’ll be looking at extensions of time for expats to file their income tax return and—separate subject— tax payments. We’ll only be looking at income tax, not estate and gift tax or other taxes (such as excise taxes), and we’re only going to focus on individuals’ taxes, not corporation taxes, or taxes applicable to exempt organizations.
We’re also going to discuss Foreign Bank Account Reporting, as this is too important a subject to flyby.
The best source of information on the subject is the IRS website at https://www.irs.gov/. The instructions for Form 1040 (https://www.irs.gov/pub/irs-pdf/i1040gi.pdfl; only 117 pagers; look at pp.10-12), which, of course, is relevant for almost all US taxpayers, and Publication 54 (https://www.irs.gov/pub/irs-pdf/p54.pdf), should be consulted also. [These links are for 2018 filings.
So here are the top 7 points expats should bear in mind:
1.The first big point is Americans abroad are liable for taxes and are required to file income tax returns and all the associated Schedules and Forms. This is true for every US citizen, wherever they reside, and whatever the source of their income. There are small exceptions for individuals that earn very little income. The number varies according to filing status: married filing jointly, married filing separately, single, etc (see form 1040 instructions for the relevant year). But there can be special situations where even if you have little or no income, you nevertheless might want to file a return.
Consider filing no matter what, even if you are below the level where it’s required. No one ever got in trouble filing unnecessarily and showing zero tax liability.
The trick is to pretend you live in Lebanon, Kansas – at the dead center of continental United States.
If in doubt, slow down and do some research. Or, if still in doubt, file something, as there are statute of limitation rules, which provide if you file and time passes by, your liability may be cut off in the future.
There are a little over a dozen Schedules, such as, Schedules A, B, C, D, and E, and a large number of Forms, such as, Form 2555, 8938, 5471, 1116. Almost all Schedules and Forms need to be attached to the Form 1040, but there are exceptions.
There is a sequence of schedules and forms and this can be found in the upper right-hand corner of whatever it is. For example, Form 5471 (Information Return of US Persons with Respect to Certain Corporations) occupies the Sequence Number 121 slot. Forms are dated, so make sure you are using the current version. This information is at the upper left-hand corner of the first page.
Laying hands on forms is simple nowadays. Go to https://www.irs.gov/forms-instructions. If you’re considering filing your own return, it may be worth bookmarking or adding this page to your favorites, because you may be using this again and again.
2. All Americans can get a 6-months extension of time to file your income tax return—from April 15 to Oct. 15—by filing Form 4868. See https://www.irs.gov/pub/irs-pdf/f4868.pdf for details. But you have to file the form timely, by April 15th. The extension is just for the requirement to file your return; it does not extend the time to pay your taxes. (In order to avoid penalties and interest, make a payment of the tax you estimate as due at the time you file Form 4868.)
3. If living outside the U.S., regardless whether you file a Form 4868, you automatically get an extra 2 months – pushing the April 15 date to June 15 – to file your return and pay any amount due without having to request an extension. This is “automatic” in the sense that you don’t have to file a form (application). Interest will be charged, however, on payments made after April 15, without regard to the extension of the April 15 filing deadline. On top of this, if you file a Form 4868 by the extended due date, June 15, you can extend for an additional 4 months, to October 15, the due date to file your return. But you have to file the form. Again, this does not extend the date for paying your tax and interest will be running on any tax liability or penalties.
Notice that both the individual living in the States and the individual living overseas end up with 6 months’ worth of extension, until October 15; it’s just that the individual living overseas has a “leg up” because he/she doesn’t have to do anything to get the first 2 months of extension.
4. In addition to the rules for extensions above, it is possible to get additional time but the rule is very narrow. You must be outside the US and meet specified requirements. You must file Form 2350 (Application for Extension of Time To File U.S. Income Tax Return). The IRS can approve your application, not approve your application but grant you a 45-day grace period, which will be treated as a valid extension of time for elections otherwise required to be made in a timely manner, not approve your application and not grant the grace, or take some other step. This special rule should not be thought of as an invitation to procrastinate. It is not.
As to all the permutations of extensions, you can find more information in IRS Publication 54 (Tax Guide for U.S. Citizens and Resident Aliens Abroad; 73 pages).
Thinking about the rules applicable to taxpayers who, in the words of Form 4868, “live outside the United States”, you can see that the busy seasons for tax return preparers working with Americans abroad are (1) immediately before April 15, for taxpayers who want for sure to avoid interest charges by filing and paying by this date and perhaps want to get a claim for refund in process, (2) immediately before June 15, for those who want to “buy” an additional 4 months for filing their return, and (3) immediately before October 15, for people who have extended the due date. The IRS can approve your application, not approve your application but grant you a 45-day grace period, which will be treated as a valid extension of time for elections otherwise required to be made in a timely manner, not approve your application and not grant the grace, or take some other step.
5.Late Filing and Late Payment Penalties are just two of the penalties that you can incur, but they are the most common.
Late Filing Penalty: If you don’t file your return by the due date, including extensions, the penalty is usually 5% of the amount due for each month or part of a month your return is late, unless you have a reasonable explanation. If you have a reasonable explanation, include it as a statement with your return. The penalty can grow to 25% of the tax due.
Late Payment Penalty: if you pay your taxes late, the penalty is usually ½ of 1% of the unpaid balance for each month or part of a month the tax is unpaid. The penalty can grow to 25% of the unpaid amount.
Notice that these penalties properly can be avoided if you don’t owe any tax.
6. Penalty for Underpayment of Estimated Tax. Since the government does not want to wait until after the close of the year and after taxpayers have calculated their tax and paid whatever is owed, taxpayers are required to pay income tax as they earn or receive income during the course of the year. The idea is that this can be done either through withholding or by making estimated tax payments. For Americans abroad, where earnings are commonly not withheld upon by the payor, estimated tax payments are key. “Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.” https://www.irs.gov/taxtopics/tc306. Notice that this is a not-so-subtle incentive to overpay one’s estimated tax with the quarterly payments and especially with a generous fourth-quarter payment on January 15, after the start of the new tax year. Taxpayers who do this have an incentive to file as soon as possible in order to claim back the overpayment. Also, recall that if you don’t know any tax, because you have overshot the mark with your estimated tax payments, you will not owe any Late Filing or Late Payment Penalties.
7. FBAR Filing. Entirely separate from the extensions rules related to income tax filings, Americans must file Foreign Bank Account Reports (FBARs). This is done using FinCEN Form 114, and you are pressed to do this electronically. Obviously, almost every American living abroad will need to file this form. The due date is April 15, but there is an automatic extension to October 15. This due date nicely matches up with the extended due date that many Americans abroad avail themselves of for regular tax filings. Because you need detailed information about each foreign bank account, including maximum account value during the relevant year, type of account, name of financial institution (for example, bank), account number, and address of the institution, you really need to get organized and get started well ahead of time. It also helps to capture all the information and throw it on an electronic spreadsheet of some sort. Then, when you are online completing the Form, you can “cut-and-paste” to your delight.
Don’t be confused by the fact that a great deal of this information is already placed, by you, in your Form 8938, which is or will be attached to your Form 1040. It’s confusing, and the two exercises are “similar but different”. Just take a deep breath and march ahead, and, if in doubt, always consult a US expat tax specialist.
The best source of information on extensions and penalties is the IRS website and the forms and instructions accessible there. You should rely upon it for the most accurate and up-to-date information.