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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

How to Retire Overseas and Avoid IRS Penalties

How to Retire Overseas and Avoid IRS Penalties

We totally get it. People with thousands and millions of dollars sometimes like to hide their money abroad.

Of course, the government disapproves of tax evasion. After the financial crisis, in 2010, Congress passed the Foreign Accounts Tax Compliance Act, also known as FATCA.

FATCA works by "double reporting": other countries agree to report assets held by U.S. account holders, who in turn must report to the IRS that they have money in foreign bank accounts each year when filing their taxes.

As expected, some people are not satisfied with the requirements. FATCA's goal is to attract "tax evasion from the 'big boys' who hide money overseas." But it is almost impossible to retire overseas without the help of a tax expert.

A little neglect leads to a big problem.

The problem for taxpayers' payers abroad is that the IRS cast such a big net, but they caught little fish, people who didn't do anything wrong.

Some taxpayers who were caught were involved in an IRS audit and faced stiff penalties after neglecting a small but crucial part of their tax return. One of the taxpayers that was audited didn't tell his accountant he had a bank account of around $3,500 in a foreign country.

Schedule B requires you to disclose whether you have a bank account in a foreign country, and most tax programs are set to 'No,' which is a little neglect but leads to a big problem over time.

It is expected of each taxpayer to tell the government that you have an account abroad, no matter how small it is. There is nothing wrong with having an account overseas. However, not revealing that you have an account in a foreign country can cause problems with Old Uncle Sam.

As with the taxpayers who defaulted, the penalties were massive, and the problem was only resolved with the intervention of a lawyer experienced in the tax situation of individuals living abroad.

Who has to file?

The amount of income you earn and the amount of assets you have available helps you determine your filing requirements.

Americans living abroad must file U.S. income tax returns. It doesn't matter where you live, whether you pay foreign taxes, or whether the United States has a tax treaty with your country of residence.

In addition to the 1040 form, there are often additional forms: for the foreign earned income exclusion or for the foreign tax credit form.

If you get only Social Security and have no other income in the world, there is a possibility you do not require to file taxes irrespective of where you live.

If you are a single taxpayer living in New York, for example, and you have a Spanish bank account of over $100,000, you must "complete Form 8938 and FBAR Disclosure" for foreign bank accounts and financial institutions.

It pays to be thorough in reporting and tax requirements. If you can't live in the United States because of the high cost of health care, taxes, and other costs, the last thing you want is to face the penalties from the IRS.

Get Expert Help

Enlist the help of a CPA. But first, be forewarned, ask if the professional has experience with the FBAR rules and what needs to be disclosed to the Revenue Agency to avoid problems.

When you're an American citizen, you pay taxes on your income all over the world. It's a question of disclosure. 

Most developed countries have agreed to comply with FATCA, so check if the country you're interested in retiring participates.

A tax professional will go over what you have and provide the best possible advice you can use to retire overseas and avoid IRS penalties (if there is one in your case).



Jim McClaflin, EA, NTPI Fellow, CTRC
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