I often hear from Americans abroad: I haven’t filed my taxes in years.
Followed by the nervous question: Do I need to file back taxes?
If you enjoyed the traveling life without wasting much thought on your US taxes, you are not alone. Many US nomads think they don’t have to file a tax return back home because foreign income can be excluded.
The problem with that is that you may be able to exclude the income and not have to pay taxes BUT you still need to file a return.
Not filing when you’re supposed to is considered tax evasion, and that is a criminal offense.
Tax evasion is a criminal offense – Does that mean jail time?
Don’t despair! The IRS has amnesty programs for filing back taxes. The key is that you come forward voluntarily and file those missing returns. If you wait until the IRS finds you, it is unlikely you get the amnesty.
It is definitely better to work with the IRS, than hoping they will forget about you. One day you may want to live in the US again and find yourself on the hook for a big tax bill.
So if you haven’t filed a tax return because you thought you didn’t have to, you should file back taxes ASAP. This is best done with the help of an experienced tax adviser as every situation is different.
Here’s what you should do to file your back taxes:
1. Find a good tax preparer that has experience with this
You may not want to spend the money on a tax guy (or gal) but the tax bill you are trying to avoid could be much higher than his or her fee. An experienced tax adviser knows how to communicate with the IRS and also what other documents need to be included with the filing.
2. Gather all your travel records
Those records help prove that you spend enough time outside the US to qualify for the Foreign Earned Income Exclusion (FEIE) of those years. Look at your itineraries, etickets, passport stamps, anything that can help stitch together your travels away from the US.
3. Get all your income and expense records
This includes money you were paid for services or made with selling products, like ebooks, courses or physical products. There is likely a paper trail, such as PayPal payments, bank transfers, etc. Don’t forget your business expenses to offset you earnings. If you haven’t kept track of business income and expenses, now is definitely a good time to start.
Income also includes investment income from savings and brokerage accounts and rent income if you rent out your place while traveling. This type of income however cannot be excluded under the FEIE because it is passive income, not earned income.
How far back do your back taxes have to go?
Usually the IRS requires filing 3-6 years back. If you have been abroad for a long time but for some reason can’t file for the past couple years, talk to a tax attorney who has experience with this. He or she can help you decide on the best strategy for filing.
Now, if this applies to you, pull your head out of the sand and take action!
