The Dizzying Tax Challenges for U.S. Citizens or Residents Living Abroad

Are you a U.S. citizen or resident living abroad?

If so, you are required to comply with U.S. tax laws and may have filing obligations
even if you did not step foot in the United States last year.

These obligations can be a surprise to many, and, with increased globalization and post-COVID-19 remote work freedoms, they may be impacting more and more people. The term “accidental Americans” has even been coined to describe those who were born in the United States and only lived here for a brief time or were born outside the United States to a parent with U.S. citizenship and may not even be aware they are U.S. citizens with associated U.S. tax filing obligations.

As a taxpayer living abroad, you need to be familiar with your U.S. tax filing requirements as well as the limitations you might face in obtaining IRS assistance and completing your filing and payment requirements. The U.S. tax system is complicated for everyone, and taxpayers abroad have additional burdens.

Taxation of U.S. Citizens and Residents Abroad

The United States, unlike almost every other country, taxes its citizens and residents on worldwide income, regardless of where they live. This means a U.S. citizen or resident must file a U.S. income tax return reporting all income, even if the individual lives and works in a foreign country. This is the case even if the U.S. citizen or resident doesn’t have any income from a source within the United States.

Given that the term “accidental American” exists to describe individuals who possibly unbeknownst to them are considered U.S. citizens, it is worthwhile to delve into who qualifies as a U.S. citizen or resident. If you were born in the United States, you are a U.S. citizen (regardless of the tax or immigration status of your parents). If you were born outside the United States, you are a U.S. citizen if one of your parents is a U.S. citizen (even if you’ve never lived in or even set foot in the United States) or if you have otherwise obtained U.S. citizenship. Once you are a U.S. citizen, you remain so unless you renounce or lose your citizenship. For tax purposes, a resident is someone who meets the green card test, someone who meets the substantial presence test, or someone who elects to be treated as such.

If you are a U.S. citizen or resident living abroad, you are generally required to file income tax returns and pay estimated taxes in the same way as taxpayers residing in the United States. You may still be able to claim various tax benefits, but the eligibility rules can be complex. Some of these available benefits include the ability to exclude certain income earned overseas, to exclude (or deduct if self-employed) some of your foreign housing expenses, and to claim the foreign tax credit if you paid income taxes to a foreign country and are subject to U.S. tax on that same income. Other tax benefits that you may be able to claim include but are not limited to the Earned Income Tax Credit, education credits, the Child Tax Credit, and the Child and Dependent Care Credit. For more information, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and the IRS website for U.S. Citizens and Residents Abroad.

In addition to intricate rules for the taxation of income of U.S. taxpayers abroad, the United States has bilateral income tax treaties with 66 countries. If you live in one of these countries, you should determine if there are treaty benefits relevant to you.

How to Get Help

If these complex rules apply to you, your head may be spinning, and you may be wondering how you can get help. Unfortunately, there are only limited options for U.S. taxpayers abroad to get assistance from the IRS.

• In-person assistance. Taxpayers living abroad have no access to in-person assistance from the IRS. There are no Taxpayer Assistance Centers (TACs) abroad, aside from Puerto Rico, and the IRS similarly has not expanded its in-person Community Assistance Visits (temporary TACs aimed at underserved areas) beyond the United States and Puerto Rico.
• Free return preparation assistance. Taxpayers abroad have almost no ability to access free IRS return preparation assistance. Programs that assist taxpayers in the United States such as the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs are not generally available to taxpayers abroad.
• Telephone service. The IRS has one dedicated telephone line for international taxpayers. The hours of operation are from 6 a.m. to 11 p.m. (Eastern Time, U.S. and Canada). This is not a toll-free line, and the IRS does not offer customer callback so you must wait on the line until an IRS representative gets to the call. You should be aware that the IRS generally limits this line to questions regarding tax accounts, such as overpayment status, balances owed, and correspondence. If you have questions regarding a more complex tax topic, you will be referred to an IRS website that provides resources, meaning you may have waited on hold only to find out your questions are ones that the representative cannot answer.
• Access to online accounts. It may be helpful to sign up for an IRS online account to access tax records, make and view payments, view your accounts and balances, create and view payment plans, obtain transcripts, and more. To access your IRS online account, you must complete an identity verification process, which can be more challenging for taxpayers living abroad. Taxpayers living abroad who have a government-issued credential and a Social Security number (SSN) may verify their identity through a third-party self-service option. If you don’t have a U.S. phone number, mailing address, or SSN, you will need to take additional steps to verify and complete the process through a video chat call and the submission of supplementary documents.
• Assistance from private tax return preparers. If you determine you need to hire someone for assistance, the IRS provides a Directory of Federal Tax Return Preparers With Credentials and Select Qualifications that may be helpful. You can search for preparers by country. However, depending on where you live, you may find that there are only limited private tax return preparers to assist you with U.S. tax obligations and they come with substantial cost.

The compliance burdens are so great for U.S. citizens and residents living abroad that I identified the following issues as two of the ten most significant problems facing taxpayers in my Annual Report to Congress last year:

1. The IRS’s draconian and inefficient approach to international information return penalties and
2. Compliance challenges for taxpayers abroad.

In a companion blog, I will delve into the basics of navigating the U.S. tax filing obligations of U.S. citizens and residents living abroad. Until then, for more information, a good starting point is Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. If you are a member of the military serving overseas, additional tax preparation resources may be available and there are special provisions which might be relevant, including a deadline extension if serving in a combat zone. For more information, see the TAS webpage on Resources for Military Personnel and Their Families.