Do you think that living overseas makes you exempt from US taxes? Or do you have unpaid back taxes that you think will disappear when you skip across the ocean? If so, there’s bad news.
There are two countries on earth that require their overseas citizens to file taxes – the United States and Libya. This means that expats are still required to file and, that’s right, pay. Even if you’re paid in a foreign currency, you must pay. Even if you pay taxes in the foreign country, you must pay.
Remember that thing they say about the only two certainties in life – death and taxes? Well, you can’t escape death by expatriating and unfortunately the same goes for your taxes.
However, there is good news. Most US expats aren’t required to actually pay anything. For the year 2010, you must have made over $91,500 before it becomes taxable. That means that most of us living and working overseas are exempt. The IRS also has a system of tax credits for those who are taxed by both the US and the country in which they live, as well as credits for things like living expenses. But you’re still required to file, even if you make well under this amount.
When you live overseas, it’s easy to forget about the mad rush and mass confusion of “tax season.” Forgetting to file will rack up late penalties and you should expect to have an audit waiting for you when you return home. If you’re living overseas to avoid paying taxes, you might be facing much bigger problems.
The Qualified Intermediary Program – They’re Watching Your Bank Account
It used to be easy enough to open a foreign bank account and forget about it. But in 2001, all of this changed with the Qualified Intermediary Program. The QI allows foreign banks to share your financial information with the IRS. If an American citizen opens an account overseas, this is immediately suspect to the IRS, which views all offshore accounts or assets as potential tax traps. They have an agreement with thousands of foreign banks to share this information.
As any Paypal user knows, in 2010 the online banking service began sharing information with the IRS as part of the agency’s push to catch offshore tax cheats. With both Paypal and the QI, the IRS can find out what you make overseas, but it can’t take the money… right?
Unpaid Taxes And Passport Renewal
Of course, everybody wants to be a good citizen and comply with tax law. It’s doubtful that there are actually people out there who would move to a foreign country to escape back taxes! Right?
But just in case there’s a little income tax skeleton in your closet, you might be in for an ugly surprise the next time you renew your passport. There’s a plan on the table to allow the Embassy to refuse to renew your passport if you have unpaid taxes. A 2011 report by the Government Accountability Office suggests that the IRS would reap billions if it were to do this.
Right now, there is a small list of individuals whose passport renewal can be refused. This includes those who have warrants for their arrest, extradition requests or missed child support payments in excess of $2,500. The GAO report itself suggests that “tax delinquencies” could be easily added to the list.
Other Alternatives For Expats
Simply leaving the country doesn’t exempt you from filing or paying US taxes. There are some ways around paying US taxes but they’re pretty drastic. One is to renounce your American citizenship and become a citizen of somewhere else. But since it’s illegal to give up citizenship for unpaid taxes, and all of those who renounce US citizenship are viewed as potential tax cheats, it may be tough to come home for a visit. Without US citizenship, Uncle Sam can easily refuse your visa request.
There are also countries that offer passports to anyone, and some legal professionals online claiming that this is a valid option. But we’re getting into pretty shady territory here. Want to become a citizen of the Republic of Dominica? If you invest enough money there and take a trip to meet the president, you can become one! It’s the cheapest country to invest in and there’s no residence requirement. So the question becomes, “How badly do you want to avoid paying the IRS?”