US citizen living abroad


D

Dave

Hello

I have been living in Canada since 1998. I didn't realize
that I was supposed to file a US tax return each year until
somebody asked me about it after this year's tax deadline.

I've since been researching this, and discovered the IRS web
pages for US citizens living abroad. According to the
Foreign Income Exclusion page
(http://www.irs.gov/publications/p54/ch04.html), I would
qualify for the Foreign Income Exclusion deduction. I have
not earned anywhere near the $80,000 that this deduction
allows (I haven't even earned half that), and thus I have
effectively earned no taxable income in that time.

My question is this: should I just go ahead and start
filing tax returns in future years, or should I somehow
acknowledge the past years?

Thanks.

Dave
 
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D

D. Stussy

Dave said:
I have been living in Canada since 1998. I didn't realize
that I was supposed to file a US tax return each year until
somebody asked me about it after this year's tax deadline.

I've since been researching this, and discovered the IRS web
pages for US citizens living abroad. According to the
Foreign Income Exclusion page
(http://www.irs.gov/publications/p54/ch04.html), I would
qualify for the Foreign Income Exclusion deduction. I have
not earned anywhere near the $80,000 that this deduction
allows (I haven't even earned half that), and thus I have
effectively earned no taxable income in that time.

My question is this: should I just go ahead and start
filing tax returns in future years, or should I somehow
acknowledge the past years?
In order to claim the exclusion, you must file a return (for
each year it applies).
 
B

Bryan Kellar

Dave said:
I have been living in Canada since 1998. I didn't realize
that I was supposed to file a US tax return each year until
somebody asked me about it after this year's tax deadline.

I've since been researching this, and discovered the IRS web
pages for US citizens living abroad. According to the
Foreign Income Exclusion page
(http://www.irs.gov/publications/p54/ch04.html), I would
qualify for the Foreign Income Exclusion deduction. I have
not earned anywhere near the $80,000 that this deduction
allows (I haven't even earned half that), and thus I have
effectively earned no taxable income in that time.

My question is this: should I just go ahead and start
filing tax returns in future years, or should I somehow
acknowledge the past years?
You must actually file a tax return to show all of your
income and then claim the exclusion. It would be the same
thing as if you had your income but had enough deductions to
make your tax zero. Unless you file the tax return to claim
the deductions, then the IRS only knows about the income and
will try to collect tax accordingly.

Here's the thing: You DO have taxable income. You must
then actually claim the exclusion to be entitled to the
exclusion. Otherwise, the IRS can come back later and claim
that you did not report your income and will tax you on it.

The other complication: The exclusion must be filed on a
timely filed tax return. That means (by the letter of the
law) you can only claim the exclusion on a return that is
filed on time, or had an extension and was filed by the
appropriate deadline. However, in actual practice, I have
never had a problem filing back returns claiming the
exclusion to get caught up, it just needs to happen before
the IRS is writing you letters and trying to actually
collect the "late" taxes.

My recommendation: File the returns now showing your income
and claiming the exclusion, and you shouldn't have any
problem.

Bryan
 
L

Lanny Williams

You must actually file a tax return to show all of your
income and then claim the exclusion. It would be the same
thing as if you had your income but had enough deductions to
make your tax zero. Unless you file the tax return to claim
the deductions, then the IRS only knows about the income and
will try to collect tax accordingly.

Here's the thing: You DO have taxable income. You must
then actually claim the exclusion to be entitled to the
exclusion. Otherwise, the IRS can come back later and claim
that you did not report your income and will tax you on it.

The other complication: The exclusion must be filed on a
timely filed tax return. That means (by the letter of the
law) you can only claim the exclusion on a return that is
filed on time, or had an extension and was filed by the
appropriate deadline. However, in actual practice, I have
never had a problem filing back returns claiming the
exclusion to get caught up, it just needs to happen before
the IRS is writing you letters and trying to actually
collect the "late" taxes.

My recommendation: File the returns now showing your income
and claiming the exclusion, and you shouldn't have any
problem.
No, Bryan, I don't thinkthis is quite right. The
regulations say that a return must be filed within one year
of the extended due date in order to claim the exclusion.
However, there is a RevProc (unfortunately, I don't have the
number handy) that says the exclusion may be allowed on a
return filed after the one year period if, after considering
the exclusion, there is no tax liability on the return.

I would also add that IRS will usually accept 5 or 6 years
returns from non-filers. Only if they have information
indicating a liability for the older returns will they
insist on filing them. In this case, I would recommend the
OP file for 2000 and subsequent years. If I read the OP
correctly, he has not received W-2s from his Canadian
employer.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans
 
D

David Woods, EA, ChFC, CLU

Dave said:
I have been living in Canada since 1998. I didn't realize
that I was supposed to file a US tax return each year until
somebody asked me about it after this year's tax deadline.

I've since been researching this, and discovered the IRS web
pages for US citizens living abroad. According to the
Foreign Income Exclusion page
(http://www.irs.gov/publications/p54/ch04.html), I would
qualify for the Foreign Income Exclusion deduction. I have
not earned anywhere near the $80,000 that this deduction
allows (I haven't even earned half that), and thus I have
effectively earned no taxable income in that time.

My question is this: should I just go ahead and start
filing tax returns in future years, or should I somehow
acknowledge the past years?
Acknowledge the prior years. You have to demonstrate you
qualify for the exclusion.
 
B

Bruce E. Cobern

Lanny Williams said:
No, Bryan, I don't think this is quite right. The
regulations say that a return must be filed within one year
of the extended due date in order to claim the exclusion.
However, there is a RevProc (unfortunately, I don't have the
number handy) that says the exclusion may be allowed on a
return filed after the one year period if, after considering
the exclusion, there is no tax liability on the return.
I'm not sure that's exactly right, either. I believe the
Rev. Proc. allows the exclusion on a late filed return as
long as the taxpayer has not yet been contacted about the
year in question, or maybe even when the IRS hasn't
assessed? But I believe it is the former.

Also, remember that the election, once made, is
automatically applicable for all subsequent years, unless
revoked. So, it is really only the FIRST year which is
eligible for the exclusion. If the exclusion has been
claimed in an earlier year, it is available in subsequent
years no matter how delinquent they are. So if, for
example, a TP claimed the exclusion in 1995 and failed to
file any subsequent returns, he would be entitled to the
exclusion, even if it is the IRS which initiates the filing
of the later returns.

One other thing to keep in mind is that the foreign tax
credit is not affected by these rules. So, even if it turns
out a TP is not eligible for the exclusion, if he has paid
taxes to the foreign country, the credit could still
eliminate all or most of his liability, depending on the
relative tax rates.
 
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B

Bryan Kellar

No, Bryan, I don't think this is quite right. The
regulations say that a return must be filed within one year
of the extended due date in order to claim the exclusion.
However, there is a RevProc (unfortunately, I don't have the
number handy) that says the exclusion may be allowed on a
return filed after the one year period if, after considering
the exclusion, there is no tax liability on the return.
Well, we're both partially right. Here's Reg. Section
1.911-7(a)(2).

(2) REQUIREMENT OF A RETURN--

(i) IN GENERAL. In order to make a valid election under this
paragraph (a), the election must be made:

(A) With an income tax return that is timely filed
(including any extensions of time to file),

(B) With a later return filed within the period prescribed
in section 6511(a) amending the foregoing timely filed
income tax return,

(C) With an original income tax return that is filed within
one year after the due date of the return (determined
without regard to any extension of time to file); this one
year period does not constitute an extension of time for
any purpose--it is merely a period during which a valid
election may be made on a late return, or

(D) With an income tax return filed after the period
described in paragraphs (a)(2)(i)(A), (B), or (C) of this
section provided--

(1) The taxpayer owes no federal income tax after
taking into account the exclusion and files Form 1040
with Form 2555 or a comparable form attached either
before or after the Internal Revenue Service discovers
that the taxpayer failed to elect the exclusion; or

(2) The taxpayer owes federal income tax after taking
into account the exclusion and files Form 1040 with
Form 2555 or a comparable form attached before the
Internal Revenue Service discovers that the taxpayer
failed to elect the exclusion.

(3) A taxpayer filing an income tax return pursuant to
paragraph (a)(2)(i)(D)(1) or (2) of this section must
type or legibly print the following statement at the
top of the first page of the Form 1040: "Filed
Pursuant to Section 1.911-7(a)(2)(i)(D)."

`I made a presumption that all of the OP's income would be excluded, based on
the fact that he said his earned income was under $80,000. That is covered
under (D)(1) above, and could occur after the IRS discovers the unfiled
returns. However, based on (D)(2) above, I would still encourage the
taxpayer to file before the IRS starts asking around, just in case there is
other income.
I would also add that IRS will usually accept 5 or 6 years
returns from non-filers. Only if they have information
indicating a liability for the older returns will they
insist on filing them. In this case, I would recommend the
OP file for 2000 and subsequent years. If I read the OP
correctly, he has not received W-2s from his Canadian
employer.
`Yes, that is right. It just seemed so easy that as long as someone was
doing 5 returns to show that they owe nothing, they might as well file 7
returns to show they owe nothing. That, and the fact there would be no
question on the issue of whether the taxpayer had not elected to take the
exclusion on the first two returns. In this case, it just seemed to clarify
the situation more.

Bryan
--------------------------------------------------------
Bryan Kellar, EA
Oregon Tax Help, Inc. -- Portland, Oregon
www.oregontaxhelp.com
www.canadatax.org

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