U.S. Tax Obligations for Americans Abroad: What You Need to Know

Living outside the United States? If you’re a U.S. citizen or U.S. person, your tax obligations don’t stop at the border. Unlike most countries, the United States taxes its citizens and residents based on citizenship, not residence. That means if you’re a U.S. person—regardless of where in the world you live—you likely still have to file a U.S. tax return every year.

This blog post outlines who qualifies as a U.S. person, what filing obligations they have, the important deadlines, common extensions available, and the potential tax implications of non-compliance.

Who Is Considered a U.S. Person?

The term “U.S. person” includes:

• U.S. citizens (including those with dual citizenship)

• Lawful permanent residents (green card holders), even if their green card has expired

• Individuals who meet the “substantial presence test” under IRS rules

• U.S. corporations, partnerships, trusts, and estates (for corporate filings)

In this article, we focus on individuals—especially U.S. citizens and green card holders living abroad.

Do U.S. Citizens Abroad Really Have to File?

Yes. U.S. citizens and green card holders must file an annual tax return (Form 1040) with the IRS, regardless of where they live or where their income is earned. This is true even if:

• You’ve lived outside the U.S. for decades

• You pay taxes in your country of residence

• You don’t owe any U.S. tax after credits or exclusions

There are also informational reporting obligations that can apply, such as:

• FBAR (FinCEN Form 114): For foreign financial accounts totaling $10,000 USD or more at any point during the year

• FATCA (Form 8938): For reporting specified foreign assets if they exceed certain thresholds

• Form 3520 / 3520-A: For foreign trusts and gifts from foreign persons

• Form 5471 / 8865 / 8621: For ownership in foreign corporations, partnerships, and certain investments (like PFICs)

Tax Filing Deadlines for U.S. Citizens Abroad

📆 Standard U.S. Tax Filing Deadline

• April 15: The regular U.S. tax deadline for residents and non-residents alike.

• If you owe taxes and don’t file or pay by this date, penalties and interest start accruing.

🕓 Automatic Extension for Expats

• June 15: U.S. citizens and green card holders living abroad automatically get a 2-month extension to file.

• Important: Interest on unpaid taxes still starts from April 15, even if you qualify for the June 15 deadline.

📋 Form 4868: Extended Extension

• You can file Form 4868 by April 15 (or by June 15 if you’re abroad) for an additional 4-month extension, giving you until:

  • October 15 to file your return.

• Note: This extension is for filing only, not for paying taxes owed.

🗓 Additional Discretionary Extension

• In rare cases, you can request a further extension to December 15 by writing a letter to the IRS explaining your situation.

• This is granted at the IRS’s discretion and does not extend the payment deadline.

High-Level Tax Implications

You might assume living outside the U.S. means you’re exempt from U.S. taxation. Not so. But there are mechanisms in place to avoid double taxation:

1. Foreign Earned Income Exclusion (FEIE)

• Use Form 2555 to exclude up to $126,500 (for 2024) of foreign-earned income.

• Must meet either:

  • Bona Fide Residence Test (reside in a foreign country for an entire tax year), or

  • Physical Presence Test (be physically present in a foreign country for 330 out of 365 days)

2. Foreign Tax Credit (FTC)

• Use Form 1116 to claim a credit for income taxes paid to another country.

• This credit reduces or eliminates your U.S. tax liability on the same income.

3. Tax Treaties

• The U.S. has tax treaties with many countries that help prevent double taxation.

• However, not all treaties override reporting requirements, and most don’t eliminate the need to file.

What Happens If You Don’t File?

Failing to meet your U.S. tax filing and reporting obligations can have serious consequences, even if you don’t owe any tax.

⚠️ Penalties

• Failure-to-File Penalty: 5% of unpaid taxes per month (up to 25%)

• Failure-to-Pay Penalty: 0.5% per month (also capped at 25%)

• FBAR Penalties: Can range from $10,000 per violation for non-willful failure to much higher for willful violations—up to 50% of the account balance.

❌ Passport Revocation Risk

The IRS can request the State Department to revoke or deny your U.S. passport if you owe more than $62,000 USD in tax debt (as of 2024).

🔍 Increased Audit Risk

Failure to file informational forms like FBAR or Form 8938 may flag you for audit or investigation.

Voluntary Disclosure & Amnesty Options

If you’ve missed filings from previous years, you can still catch up and avoid severe penalties.

1. Streamlined Filing Compliance Procedures

• Designed for non-willful violations by expats

• File 3 years of tax returns and 6 years of FBARs

• Usually avoids penalties

2. Delinquent FBAR Submission Procedures

• For those who failed to file FBARs but have reported all income

• File late FBARs with a statement explaining the reason

3. Relief Procedures for Certain Former Citizens

• For dual citizens who never filed and want to renounce U.S. citizenship

• Requires filing 5 years of returns and Form 8854

Common Mistakes Expats Make

Here are a few frequent missteps that can be costly:

• Assuming you don’t need to file if you don’t owe taxes

• Forgetting about foreign pension plans (some are considered foreign trusts)

• Not filing FBARs or FATCA forms

• Thinking the IRS won’t pursue you abroad (they can and do)

Filing from Abroad: Practical Tips

✅ Get a U.S. Tax Professional

International tax rules can be complex, especially if you have multiple income sources, own a corporation abroad, or have a non-U.S. spouse.

✅ Right Filing Software

Many U.S. tax programs are not built for expats. At Modern Axis CPA we use top the best, CCH Axcess Tax which is the only solution available for Canadian accounting firms for e-filing your return. CCH Axcess can handle:

• Form 2555 and Form 1116

• International compliance forms such as Form 5471, 8865, 3520, 8621, 8938, 8858

• Controlled Foreign Corporation (CFC) Calculations

• Customizable Foreign tax Credit Buckets

• Tax Treaty Optimization Tools

• Automatic Extension Workflows

• Dual Status Returns

• FBAR submissions

• FATCA-related forms

✅ Pay Electronically

You can pay the IRS online through:

• IRS Direct Pay (from U.S. bank accounts)

• International wire transfers

• Credit or debit card (fees apply)

Summary: Key Takeaways for U.S. Citizens Abroad

Final Thoughts

Living outside the U.S. doesn’t free you from your U.S. tax obligations—but there are ways to reduce your tax burden and stay compliant. The key is understanding your responsibilities and acting early.

Need help navigating these complex cross-border tax rules? The team at Modern Axis CPA is here to guide you. From U.S. expat filings to FBAR and FATCA compliance, we specialize in helping Canadians and other residents abroad stay compliant with U.S. tax laws while minimizing their tax liability.