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Expats are more likely to be audited and charged with a tax crime by the IRS

On Behalf of | Oct 18, 2022 | Internal Revenue Service

How likely are you to be audited? Your chances depend on a variety of factors; one of the most important is your residency status. If you’re an ex-pat, you may have a higher risk of being audited by the IRS than other taxpayers for several reasons- like self-employment income, listing higher than average deductions, bank balances in foreign banks and particularly if you are working overseas and have a large income. In fact, according to the Internal Revenue Service Data Book, US taxpayers living abroad were ten times more likely to have their taxes audited by the IRS than the .05% of tax returns filed by those living stateside.

Living and working abroad as a US taxpaying citizen

Taxes are based on citizenship in the US. Therefore, U.S. citizens need to follow the same rules for filing and paying taxes regardless of whether they live inside or outside of the US. You are required to report and pay taxes on your worldwide income. A portion of your worldwide earnings is eligible for the Foreign Earned Income Exclusion. Additionally, some foreign taxes paid qualify for the Foreign Tax Credit. However, this credit only applies to foreign-based income and cannot be used to offset income that is earned in the United States.

Extra considerations for those living and working abroad

U.S. taxpayers who own foreign financial accounts must report those accounts to the U.S. Treasury Department, even if they don’t generate taxable income from those accounts. Taxes must also be paid on self-employment income Taxpayers must also report virtual currency transactions to the IRS on their tax returns; these transactions are taxable by law just like any other property transaction.

Penalties for failing to report

Anyone living abroad and failing to file taxes could be ordered to pay fines or be incarcerated- just as if they were living in the US.  Additionally, there are penalties for failing to report offshore accounts. A “non-willful,” that is, accidental, failure to report overseas bank accounts can still result in penalties up to $10,000 per account, subject to inflation. Willfully failing to report is subject to harsher penalties, either $100,000 or 50% of the balance in each unreported account. In addition to harsher penalties, you could also be charged with tax fraud and be extradited to the US to be charged formally in federal court.


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