What if I Didn’t Report Foreign-Earned Income on My Federal Return? (2024)

FAQs

What if I Didn’t Report Foreign-Earned Income on My Federal Return? ›

As a U.S. taxpayer, you can face penalties for failing to report your foreign-earned income even if you don't owe any federal income tax. The IRS penalizes both failures to report and failures to pay and the penalties for reporting violations can be substantial.

If you haven't filed a tax return for the year(s) when you had unreported foreign income, you need to get those filed right away. The IRS charges failure-to-file penalties of 5% per month up to 25% of the unpaid tax. So it's in your best interest to get the late returns filed ASAP, even if you can't pay the tax due.

Civil Penalties for Failure to File FBAR

If you committed a willful violation, the penalties can rise to $100,000, or 50% of the foreign account balance at the time the each violation occurred. Ultimately, you could end up owing more money than the accounts in question actually hold.

One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act.

Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts.

How to File Your Taxes without a W-2. If you do not receive a W-2 form for your employment, or if you work for a foreign employer and therefore do not receive a W-2, you can file your taxes using Form 4852. Form 4852 is a substitute that taxpayers can use if they never received a W-2 (or if their W-2 is inaccurate).

Like FBAR, Form 8938 carries a $10,000 penalty for not filing. If the IRS sends you notice of your failure to file, you have 90 days to comply or be subject to an additional $10,000 per month, up to $50,000, until you do file. There is a 40 percent penalty for any tax underpaid on foreign financial assets not reported.

If you're an expat and you qualify for a Foreign Earned Income Exclusion from your U.S. taxes, you can exclude up to $112,000 or even more if you incurred housing costs in 2022. (Exclusion is adjusted annually for inflation). For your 2023 tax filing, the maximum exclusion is $120,000 of foreign earned income.

If the IRS finds a major error, they may go back as far as six years. For instance, if you fail to report foreign income valued at more than $5,000, the statute of limitations is automatically extended to six years. If you report less than 25% of your total gross income, this can also extend the statute to six years.

Unreported income: This is the biggest issue that brings taxpayers under criminal investigation. This includes leaving out specific transactions, like the sale of a business, or entire sources of income, such as income from a side business.

How do the US know about foreign income? ›

If you earned foreign income abroad, you report it to the U.S. on IRS Form 1040. In addition, you may also have to file a few other international tax forms relating to foreign earnings, like your FBAR (FinCEN Form 114) and FATCA Form 8938.

Through FATCA, the IRS receives account numbers, balances, names, addresses, and identification numbers of account holders. Americans with foreign accounts must also submit Form 8938 to the IRS in addition to the largely redundant FBAR form.

That is because the U.S. follows a worldwide income model. Therefore, when a U.S. person is either a U.S. Citizen, Legal Permanent Resident, or Foreign National who meets the substantial presence test, they are required to file a Form 1040 to report global income.

Only U.S. citizens who meet certain qualifications may claim the foreign earned income inclusion, among them being a U.S. citizen or resident alien. If you are living and working abroad, it may be worth investigating the foreign earned income exclusion before you prepare your taxes.

There's no penalty for failure to file if you're due a refund. However, you risk losing a refund altogether if you file a return or otherwise claim a refund after the statute of limitations has expired.

The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2023, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $120,000 per qualifying person. For tax year 2024, the maximum exclusion is $126,500 per person.

As a US citizen living abroad, it's important to understand your filing obligations to remain compliant with the IRS requirements and avoid complications. Failing to file a tax return can lead to penalties and legal repercussions, even if you're living outside the US.

You can choose whether to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes.

Generally foreign source income received by a nonresident alien is not subject to U.S. taxation. Refer to Source of Income for more information.