# Help! I am at fault...



## Jorge.Sepu34 (Oct 31, 2017)

Hello fellow expats:
I have been reading a lot the last couple of weeks and realized that I have an obligation to file income tax in the US. Won’t deflect the blame, it is totally my responsibility but I think the US Global income system is very odd.

I have the following situation:
Born in New York to Chilean parents. I am a US Citizen by birth.
Family brought me back to Chile when I was two years old. Since then I am a Chilean Citizen.
Went to school and university here in Chile
Worked in Chile for a few years. Filed only Chilean taxes, no US taxes.
Moved to the US (Chicago) in the mid 90s and worked there for 8 years. Filed US taxes, no Chilean taxes. With my current understanding of US Global system I should have been audited by the IRS for “suddenly” filing my first return at age 30. Didn’t happen.
Returned to Chile in the late 2000s and have lived here ever since. I have filed only Chilean taxes, no US taxes (same thing I did before moving to the US). Haven’t heard a word from anyone (IRS, US Embassy, the Chilean Revenue Service, my local bank, etc…). A few weeks ago, I met another US citizen living here in Santiago that told me about the nuisance of filing in both places. That made me look online and realized I have been at fault. I feel very uncomfortable.
On a good year, I make close to US$200K. Average year is US$150K. For that level of income, taxes here are higher than US federal tax (filling jointly), which leads me to believe I owe nothing except for the potential penalties for late filing. Questions:
1.	Do any of you recommend trying the Streamlined process?
2.	Couldn’t I just file the missing 9-10 years, claim the Foreign Credit and wait to see what happens?
3.	Can the Foreign Credit balance be carried forward?
4.	If there is no tax owed, will I still be charged late filling penalties?
5.	When concluding I owe nothing I am comparing the Income tax that I actually paid each year with the US Federal Income tax for the same income converted at average exchange rate for that year. Is that correct?
I appreciate the advice in advance.


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## Bevdeforges (Nov 16, 2007)

OK, don't feel like the Lone Ranger. There are LOTS of folks in a similar situation.



> With my current understanding of US Global system I should have been audited by the IRS for “suddenly” filing my first return at age 30. Didn’t happen.


And probably won't happen. The IRS has little or no knowledge of foreign source income and, with no overseas offices any more, is very unlikely to audit anyone living overseas unless something particularly "interesting" comes to their attention that indicates an overseas taxpayer may owe lots of $$$ in back taxes. 



> On a good year, I make close to US$200K. Average year is US$150K. For that level of income, taxes here are higher than US federal tax (filling jointly), which leads me to believe I owe nothing except for the potential penalties for late filing. Questions:
> 1.	Do any of you recommend trying the Streamlined process?


If it will help you sleep at night, then certainly. Otherwise, it's up to you if you want to set yourself up to continue filing forever more.


> 2.	Couldn’t I just file the missing 9-10 years, claim the Foreign Credit and wait to see what happens?


If you go streamlined, you only wind up needing to file 3 years back - and if you really don't owe much or anything, then you'll be absolved of the years prior to that.


> 3.	Can the Foreign Credit balance be carried forward?


Yes, but you can take both the Foreign Earned Income Exclusion and the Foreign Tax Credit in any given year, which should wipe out your tax liability to the US.


> 4.	If there is no tax owed, will I still be charged late filling penalties?


No. The late filing penalties are a percentage of the taxes owed. If you owe nothing, there is no penalty.


> 5.	When concluding I owe nothing I am comparing the Income tax that I actually paid each year with the US Federal Income tax for the same income converted at average exchange rate for that year. Is that correct?


Not quite. But it's a reasonable approximation. The Foreign Tax Credit splits your taxes paid and taxable income into at least two parts: "earned" income and "passive" income (basically, investment income). You have to allocate what you paid into those two categories and then apply the tax paid on each category separately. That's one reason why using the FEIE can simplify your life quite a bit, even if it only applies to the first $100K or so of earned income.

But first take a long, hard look at your risk situation and decide just how critical it is to start filing at this point.
Cheers,
Bev


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## Nononymous (Jul 12, 2011)

Sound advice.

If you have no plans to return to the US, and have no assets, income or other financial ties, or are not expecting to collect US social security, then there is really no reason for you to begin filing. Continue ignoring this silly US law.

You may have issues with banking, if your bank in Chile is aware that you are a US citizen they may do FATCA reporting, and in some countries it can be difficult to open a new account. But I don't know how strict the Chilean banks are being on this. Certainly if you have existing accounts you should never volunteer any information about your US place of birth or citizenship - much simpler if banks don't know.


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## Jorge.Sepu34 (Oct 31, 2017)

Hello there. Bev, Nononymous, thanks for your replies. 

The income I describe above is all in the form of salary wages and the Income taxes are therefore paid by my employer on a monthly basis. Aside of Publication 514 is there other document I should study as I prepare the filings? 

Plan to stay here for the rest of my life and retire here. Today I don't see a pressing need to become complaint but still would like straighten things up.

Still unsure if for my situation streamlined procedure is better than a quiet filing of 10 years in a row. In both cases, I am making the assumption that there is no tax owed since 100% of income is foreign-sourced and the taxes paid here are a good bit higher as compared to sole US Federal Tax for the equivalent income.

Finally, I have banked with the same local institution for decades and can't imagine how on earth could they figure out my birthplace or dual citizenship status. For now I think I will focus on the income tax returns and then on the FBARs (which I also believe not to be required as I don't cross the reporting threshold).

Guys, thanks again for the responses. I will continue to research this and figure what to do but my aim is to become complaint soon. If any of you have aditional comments, information or thoughts, I value them in advance.

Thanks. JS.


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## Bevdeforges (Nov 16, 2007)

Don't confuse the filing requirement for income taxes with the FBAR requirements. They are two separate and distinct things.

You are supposed to file FBARs if the sum total of all your non-US accounts exceeds $10,000. It's perfectly possible (and actually quite common) that you may be required to file FBARs without having any income tax filing liability (or requirement). So, if in doubt, that's probably the forms you should consider filing, just to say you did so.

As far as the income tax filings go, I see little reason to back file 10 years, when back filing 3 years (under the Streamlined Compliance deal) will do the trick, as long as you don't owe any back taxes. Filing further back than necessary is only going to "look strange" and that's one thing you really don't want to do here.

The main question is whether to file at all or simply remain under the radar. The only risk is the threat from the IRS to close the Streamlined Compliance program once they are convinced that overseas residents have no more excuse for "not knowing" about their filing requirement. I don't see that happening any time soon - certainly not in my lifetime.
Cheers,
Bev


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## Nononymous (Jul 12, 2011)

I would personally advise you not to file taxes or FBARs. You are off the radar, and no reason why you shouldn't stay that way. There's a possibility that you could owe US taxes at some point, due to differences in how investments are treated etc. Retirement accounts and mutual funds can be a paperwork nightmare, 

What I would do first is look into the tax treaty and see if there is any means for the US to collect fines or penalties in Chile against a Chilean citizen (from birth, in your case). Likely there is no provision for the Chilean government to assist in collecting US government debts against its own citizens. In this case you are safe from any possible penalties, so why file at all? It only runs the risk of further grief if tax plans actually make things worse for expats.


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## Jorge.Sepu34 (Oct 31, 2017)

Thanks again for your valuable posts. I am still indecided because even though I feel safe that I might forever fly under the radar I feel bad about being non-complaint.
To recheck again my assumptions, would you recommend playing a bit with a software package such as TurboTax or TaxAct? Any particualr preference?

And to make sure I have my concepts correct:
* 100% of my income salary/wages.
* Since my income taxes actually paid each year to chilean revenue service were higher than the US Federal Tax for that same income figure, I should use only FTC form 1116 and not use FEIE. Right?
* Using the 3-year streamlined procedure would require signing a non-willful statement that I woud like to avoid (I agree I made a mistake but still owe nothing).

I know I am repeating myself but want to make sure I have understood the basics before diving into the publications, forms, etc...

Thanks and goodnight!


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## Bevdeforges (Nov 16, 2007)

Ultimately you do whatever lets you sleep at night. Just be aware that once you get back in the fold (i.e. compliant), you pretty much have to keep up with the filings - especially if you have used the Streamlined Compliance route because you can't do that a second time.



> * 100% of my income salary/wages.


Yes. 


> * Since my income taxes actually paid each year to chilean revenue service were higher than the US Federal Tax for that same income figure, I should use only FTC form 1116 and not use FEIE. Right?


Not necessarily. It's entirely possible (and completely legal) to use both the FEIE and the FTC. Makes the filing a little more complicated, due to having to partition your income and expenses between the FEIE and the FTC parts of your returns. But it's how most folks do things if their salary is above the FEIE limit, or for a variety of other reasons. The FEIE really simplifies the process for you if most of your income comes from salary or other "earned" sources.


> * Using the 3-year streamlined procedure would require signing a non-willful statement that I woud like to avoid (I agree I made a mistake but still owe nothing).


Up to you, but it's fairly simple to phrase your statement in such a way that you're "non-willful" even if it comes down to "I forgot." The only real no-no would be if you had already used the Streamlined process in a prior year.
Cheers,
Bev


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## Jorge.Sepu34 (Oct 31, 2017)

Thanks Bev!

So, would it help using a software to run numbers (for example, TaxAct)?
Also, from what I have gathered so far, the publications to read are 54 and 514. Others I may have left out?
Finaly, I read in more than one place that you either choose FEIE or FTC but not both. In which of these documents does it clarify this?

Again, I greatly appreciate the help and sound advice.


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## Nononymous (Jul 12, 2011)

Jorge.Sepu34 said:


> Thanks again for your valuable posts. I am still indecided because even though I feel safe that I might forever fly under the radar I feel bad about being non-complaint.


Feeling bad is the last thing you should do. US law is idiotic, there's nothing to feel bad about if you choose to ignore it. (Unless by "feeling bad" you mean feeling nervous and uncertain, rather than guilty. Well, unfortunately, the uncertainty won't entirely go away if you become compliant.)

Leave the emotion out of it, make the decision that is best in practical terms. Look at the risks of doing nothing (low chance of detection, even lower chance of assessing penalties) versus the risks of becoming compliant (once you're back in it's hard to get out, plus if you have certain types of investment there are complex reporting requirements and the possibility of owing the US money even if you pay higher income tax in Chile).

You could also renounce to make the problem go away, for the low, low cost of US$2350. Tax compliance is optional - not necessary to be up to date before you renounce or even file anything after renouncing.

If you do go into streamlined, don't worry about the non-wilful versus wilful business. Just say you were "unaware" of your tax obligations. Keep it simple. It's not like they can read your mind.


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## Bevdeforges (Nov 16, 2007)

Either TaxAct or Turbo Tax or any of the over-the-counter tax programs would give you an idea of how all this stuff is supposed to be reported. Just make sure they have the appropriate forms (2555 and 1116) available.

Better yet, wait until February when the FreeFile sites will open up and you can play around with the programs on a free basis. Or check the websites (after about mid-January, when the 2017 forms will be finalized) to see which programs will allow you free access (usually limited to fairly simple forms). 

As far as I know, only TaxAct will sell you a program where you can download the program to your own computer - for about $40 or so. That gives you lots more freedom to play around with "what if" situations without any worries about online security. (And by "what if" I mean like "what if" I report this income, but not that income - what if I report that "managed investment fund" as if it were a bank account, etc.)

While I pretty much agree with Nononymous about "risk assessment" and the option of non- or partial- compliance, I've been helping a friend with a Streamlined Compliance filing, and because she has some rather particular concerns and considerations, she has every good reason to get compliant and then "engage with" the issue of whether or not she wants to "invest" $2350 to be officially liberated from the whole thing. While I gave her the "fly under the radar" pep talk, we discussed it at some length and I can well appreciate her concerns and her reasoning.

Given that I wrote her "statement" for her (due to the language issue), I can assure you that it is pretty easy to come up with sufficient "proof" of non-willfulness, even if you basically just forgot about it. 
Cheers,
Bev


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