You may believe that by leaving the country you no longer need to pay taxes, but this isn’t true. If you are an ex-pat, here are 4 tax myths you should know aren't true to avoid costly mistakes.
1. If you're out of sight, you’re out of mind for the IRS
The U.S. is one of the few countries in the world that bases its tax system on residency and citizenship. No matter where you live, or if you're paying taxes to that country's tax system, you're still obligated to file your tax returns in the U.S., every year, if you have a certain level of income.
This doesn't necessarily mean you're going to have to pay taxes, for there are various exemptions you may qualify for, but this is not something you can decide on your own. Not filing your taxes can bring enormous trouble and consequences that go from being pursued by the IRS to probably having your Passport revokes.
2. Renouncing to U.S. citizenship is the only way to lower taxes
Because you must file taxes, as a U.S citizen, even if you are somewhere else in the world, some people think that renouncing to U.S. citizenship is the only way to lower their taxes. But, there are other ways of lowering U.S. taxes and still retaining citizenship.
The Foreign Earned Income Exclusion was designed to help you avoid double taxation, and will allow you certain tax exclusions provided you meet the specifications.
3. Any foreign bank accounts with a balance under $10,000, doesn't have to be declared
The Report of Foreign Bank and Financial Accounts (FBAR) regulations clearly state that you must submit an FBAR if "the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported." This means that if you have one or more foreign accounts, you need to add the balances and not count them separately, which is what some people understand.
Note: this includes every type of account and also covers any account in which you have a financial interest or have signature authority over.
4. You can’t fix tax errors
You may understand that, as a US citizen, you may qualify for tax breaks such as the Foreign Earned Income Exemption, but you may not think that you actually do qualify.
If you’ve made the mistake and paid for taxes you didn’t have to pay, it is possible to amend past tax returns. A good accountant can review your past returns and find any errors or overpayments that can be corrected.
5. The IRS is never going to find you
Even if you're living on a desert island, if you have a bank account, you're probably traceable. Your financial records are transparent, so whether you report your accounts or not, the IRS can still access them.
Foreign financial institutions must pass on data related to any of their clients who are U.S. citizens, so it’s not worth trying to avoid the IRS. Facing up to your responsibilities will be easier in the long run.