This Is How Much Not Paying Your Taxes for a Decade Will Cost You
Nobody ever told me that I still had to pay taxes in the U.S. even if I didn’t live there.
The United States is one of a few countries in the world that demands its citizens file and pay taxes even though they reside abroad and already pay taxes somewhere else. It’s yet another factor—like our lack of federally-mandated paid parental leave—that makes this great country part of a very select and special club.
I don’t know how many of these factors went into my adolescent decision to someday move to Europe, but I started planning my expatriate life early. My parents, staunch defenders of good values, financial habits and common sense, agreed to my plan on the condition that I do it on my own buck — and only after getting my university diploma. I moaned because even then I already lacked some degree of common sense, but took them up on their word.
After taking 20-hour course loads for three semesters straight, I finally got my walk down the collegiate plank on a rickety stage wearing decidedly too-high heels for my Converse-accustomed feet. Little did I know that the wobbly shuffle towards my ticket out of Dodge would aptly represent my fiscal future.
Overpacking two enormous suitcases, I excitedly departed for the Old Continent, naively planning to come right back after a semester of teaching English in Spain.
But my new and improved European lifestyle completely engulfed me. One job led to the next, I extended my stay, then I was accepted into grad school, then came more jobs, moves, languages, a husband. Only when I was five-years deep did I realize that I was likely not going back to the States, ever.
And only ten years in, after I had temporarily moved to South America, did I finally realize that the IRS had never forgotten me and had been waiting for me all this time. I passed the U.S. Foreign Service exam, and as I prepared for my interview, I noticed that my potential security clearance would require proof of fiscal compliance for the last ten years. That’s when it finally sunk that, as far as the IRS was concerned, I was likely delinquent.
“What do you mean you haven’t paid taxes in ten years?” my mom screamed over the phone.
“Well, uh, nobody ever told me that I still had to pay taxes in the U.S. even if I didn’t live there!” I retorted. (“A common misconception,” my accountant later reassured me.)
Despite my parents’ sage teachings, somebody dropped the ball when it came to imparting one’s duty to file taxes every year. A child of divorce, one assumed that the other had taken care of having the talk, somewhere after the all-important “the birds and the bees” and a tad before the more somber “these are the instructions for when I die.”
To be fair, I had been filing my taxes — in Europe, or wherever I was living at the time. In the United Kingdom, Her Majesty’s Revenue and Customs office (legit full name) calculates your taxes for you and sends you a letter, either with a check or demanding money. It’s an exciting game of Russian roulette every year.
Having just turned 30, I had recently self-branded myself as a fully-fledged grown-up, and as such, I immediately felt the duty to make things right — regardless of any possible future in the U.S. Foreign Service. But how do you solve a problem like filing ten years’ worth of taxes when you had approximately twelve different international residences in the last decade?
If admitting I had a problem at hand was the first step, acknowledging I needed help followed very shortly thereafter. Some nervous emails and calls later, I got a recommendation for a U.S. accountant who specialized in Americans living abroad.
Although I had prepared an outline of the situation for our first meeting, his eyes widened as he skimmed the details of my case. The whole procedure felt like being at the doctor’s.
“How bad is it?” I inquired.
“Well, since you are doing it out of your own volition and the IRS hasn’t come looking for you yet, it’s not that bad.”
“Can you fix it?” I asked, with a hint of despair.
“Yes, but it will take some time and you will have to track down a lot of information.”
And so I went on a months-long international mission, looking for old tax returns in Spain, check stubs from France, certificates proving I was a student in Italy. I poured through years of invoices I had issued as a freelance translator, adding up the numbers and converting currencies to the U.S. exchange rate for the year according to IRS charts.
The only benefit was that, seeing how 10 years worth of taxes were already late, time was on my side. I compiled spreadsheets full of information, mapping out which country I was living in and when, as well as my estimated income for each month of my life since 2007. Meanwhile, my accountant tried to decipher tax agreements between the U.S. and whichever country I had been living in at the time.
Then came the hard part: parting with my money. Just the act of filing each tax return would cost $250 per fiscal year in CPA fees. A bargain, if you ask me, because although my undergraduate degree is in economics, the fiscal world still confuses me and I have no interest in attempting to pour through all my accounts and filing my own returns.
But when you multiply that amount times ten, without even factoring in any taxes I could possibly be liable for in the calculations, it became obvious that it was time to have a serious chat with my life partner and fellow sharer of finances.
That is how I sat down my very British husband and briefly explained the U.S. tax system to him. The aftermath went something like this:
“So you mean that, even though you don’t live in the country, the government still has the right to tax the income you earn abroad?”
“Since you are already paying your taxes in the country you reside, isn’t that double taxation?”
“Well, technically, I guess.”
“Isn’t that one of the reasons your people revolted, wasted an awful lot of tea in the Boston harbor, launched a Revolutionary War and eventually declared your independence from Britain?”
“Hush! We must now shave thousands of dollars from our budget to pay for the privilege of me being American.”
Still somewhat in disbelief, he did eventually take this unexpected budget shocker in stride—but at the price of adding this factoid to his running arsenal of American jokes. (Not like he was lacking in that sector after November’s election, mind you.)
The imbroglio unfolded to a more or less happy ending. As a freelancer, I was able to get hefty deductions for my home office, equipment, travel, and other costs of running a small business. Having regularly earned a European salary that was barely above the U.S. poverty line also came with its benefits, lowering my tax burden.
Once the calculations were done, turns out I had missed out on some juicy refunds from Uncle Sam for the first few years of my career, particularly while I was still a postgrad student. I did owe some small amounts in the lower hundreds between 2015 and 2016, but the heavy-hitter was 2017 when I came out owing an amount in the lower four digits, reflective of my surge in income.
The total cost of (accidentally) not filing my taxes for a decade, including my accountant’s fees, came to around $5,500.
Yet, the hidden expense was time: I spent an estimated 3 weeks playing detective and sorting through my complex financial history. For a freelancer, that equals a considerable amount of lost income.
I don’t know if I’ll ever move back to the U.S., but you can bet your bottom dollar that I’ll never neglect to file my U.S. taxes again.
Carla McKirdy is a writer, translator and — as of 2017 — a law-abiding citizen who pays her U.S. taxes. She currently resides in Cambodia. Learn more at www.carlamckirdy.com.
This article is part of The Billfold’s Tax Series.
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