As the October 15 tax deadline approaches, many US expats are focused on finalizing their returns. While extensions provide more time, they also create opportunities for overlooked details and errors. Being aware of the tax deadline common mistakes can help you stay compliant with the IRS and avoid unnecessary penalties.
If you need assistance with filing your US taxes, don’t hesitate to reach out to Universal Tax Professionals. We specialize in providing comprehensive US expat tax services tailored to meet the unique needs of Americans living abroad.
Not Requesting an Additional Extension (If Needed)
One of the most common tax deadline mistakes is assuming that the October 15 extension is the final option. While it’s important to file your US tax return by the October 15 deadline, unforeseen circumstances can make it difficult to meet this obligation. If you find that you cannot finalize your tax return by this date, you have the option to request an additional extension until December 15. However, it’s crucial to understand that this extension is not automatically granted.
Unlike the initial October 15 extension, the December extension requires a formal written request to the IRS. This request should clearly articulate the reason you need extra time and must be submitted before the October 15 deadline.
When making the request, be sure to include all relevant details and documentation to support your case. This not only helps the IRS understand your situation but also demonstrates your commitment to complying with tax laws. Keep in mind that the December extension still does not extend the deadline for any taxes owed; you must estimate and pay your tax liability by April 15 to avoid late payment penalties.
Failing to Meet the October 15 FBAR Deadline
Another critical error tied to the tax deadline is overlooking the filing of the Foreign Bank Account Report (FBAR), also known as FinCEN Form 114. Unlike your annual tax return, the FBAR must be submitted directly to the US Department of the Treasury.
The FBAR is due annually on April 15, with an automatic extension until October 15, aligning with the individual tax return deadline. However, after October 15, there is no extension to file an FBAR. Many expats overlook this requirement or forget to submit it altogether, leading to serious repercussions.
Failing to meet the FBAR deadline can result in significant penalties. The IRS imposes both non-willful and willful violations, each with its own set of consequences. Non-willful violations can incur penalties of up to $10,000 per violation, while willful violations can lead to fines exceeding $100,000 or 50% of the account balance at the time of the violation. These penalties can quickly add up, particularly for individuals with multiple foreign accounts.
Using Incorrect Exchange Rates
One common tax deadline mistake that US expatriates make when filing their tax returns is using the incorrect exchange rates for their foreign income and expenses. The IRS requires that all foreign income reported on your US tax return be converted into US dollars. Failing to do this correctly can lead to inaccuracies in your tax filings, resulting in potential overpayment or underpayment of taxes, which could attract penalties or interest.
To avoid this mistake, US expats should use the appropriate exchange rate for conversion, either the average annual exchange rate or the spot exchange rate on the date the income was received.
Reputable sources such as the IRS, the Federal Reserve, or financial news outlets provide reliable historical exchange rate data. When filing your tax return, ensure that the converted amounts are accurately reported on the relevant forms, and double-check all calculations for accuracy.
Not Updating Personal Information
Failing to update personal information with the IRS is a common mistake that can lead to various complications for US expatriates during tax filing season.
One significant aspect of this is using an outdated name, such as a married name instead of a maiden name, especially if you haven’t updated your information with the Social Security Administration (SSA). This common mistake can cause serious issues when the IRS processes your tax return.
When you file your tax return using a name that doesn’t match the one on file with the SSA, it can trigger delays in processing your return and lead to potential rejections. The IRS uses your Social Security number to match your tax return with your SSA records, and any discrepancies can raise red flags. This could result in your return being flagged for further review, leading to delays in any refunds or requiring additional documentation to verify your identity.
Moreover, failing to update your personal information can impact your eligibility for certain tax benefits, such as credits and deductions that may hinge on your filing status. If your marital status changes and you don’t update your name accordingly, you may miss out on tax advantages available to you as a married filer.
Missing the October 15 Deadline for other Tax Forms
US expats must remain vigilant about not only their tax return (Form 1040) but also a variety of other important forms that may need to be submitted. Depending on their individual situations, missing the deadlines for these additional forms can lead to penalties and complicate their overall tax obligations. Among the common mistakes:
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Form 8938 (Statement of Specified Foreign Financial Assets)
US expats may also need to file Form 8938 if their specified foreign financial assets exceed certain thresholds. This form is due along with the tax return and requires disclosure of assets such as foreign bank accounts, stocks, bonds, and other investments held outside the US.
The thresholds vary based on filing status and whether the taxpayer lives in the US or abroad. For instance, single filers living abroad must file if their total foreign financial assets exceed $200,000 on the last day of the tax year or $300,000 at any time during the year.
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Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations)
If you are a US citizen or resident who owns shares in a foreign corporation, you may be required to file Form 5471. This form provides the IRS with essential information regarding the foreign corporation and its operations. The filing requirements can be complex, and the penalties for failure to file can be significant, including fines of $10,000 per form, along with additional penalties for failure to provide required information.
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Form 8865 (Return of US Persons With Respect to Certain Foreign Partnerships)
For those who have interests in foreign partnerships, Form 8865 must be filed to report income, deductions, and other financial details about the partnership. Similar to Form 5471, the penalties for failing to file can be steep, often resulting in fines of $10,000 per form.
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Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts)
If you receive gifts from foreign persons or if you are involved in transactions with foreign trusts, you may be required to file Form 3520. This form provides important information regarding such transactions and is due on the same date as your tax return, including any extensions.
Failing to Sign and Date Returns
It may sound basic, but forgetting to sign and date a return is another common tax deadline mistake. This seemingly simple step is crucial for ensuring that the IRS considers your return valid. When expatriates fail to sign and date their tax returns, it can lead to significant complications, including delays in processing and potential penalties.
A signed tax return declares that the information contained within is accurate and complete to the best of the taxpayer’s knowledge. When a return is not signed, the IRS may treat it as never filed.
To avoid this mistake, establish a checklist for your tax preparation process. This should include a reminder to sign and date your returns. If filing electronically, be aware that e-filing systems typically require an electronic signature, which is equally important for the validity of the submission.
Relying on Incorrect Tax Software
One critical mistake that US expatriates should avoid when preparing their tax returns is relying on incorrect or inadequate tax software. While many software programs are designed to assist with tax filing, not all are equipped to handle the complexities of expatriate tax situations. Using the wrong software can lead to significant errors and missed opportunities for deductions and credits.
Here are several reasons why relying on inappropriate tax software can be problematic for expats:
- Limited Features for Expatriates: Many mainstream tax software packages are tailored for US residents and may not include essential features specific to expatriates, such as foreign income reporting, Foreign Tax Credits, or compliance with FBAR requirements.
- Failure to Address Unique Forms: Expat tax situations often require additional forms (like Form 8938 for foreign financial assets or Form 5471 for foreign corporations) that some software may not support, leading to incomplete filings.
- Outdated Tax Laws: Tax laws frequently change, and some software may not be updated regularly to reflect the latest IRS rules and regulations affecting expatriates.
- Lack of Guidance: Tax software often requires users to input their information but provides limited or no guidance on specific expatriate issues. This lack of support can leave users uncertain whether their filings are accurate or compliant with IRS regulations.
As the October 15 tax filing deadline approaches, US expatriates must remain vigilant in their tax preparation efforts. Understanding the unique challenges and responsibilities of filing taxes from abroad is essential for compliance and peace of mind.
Seeking the expertise of tax professionals specializing in expatriate tax matters can provide valuable insights and ensure that all aspects of your tax obligations are met accurately and on time.
