Do I Have to File an Income Tax Return While Working Abroad?

U.S. Tax Treaties

the U.S. tax office works with over 42 different countries. Both the foreign taxing authority and the IRS can exchange information on foreigners living in the other country. Besides the exchange of information on foreigners living out of the US, the IRS usually has agents attached to the U.S. Embassy in that country. Their purpose is twofold, to learn of Americans living in the foreign country who do not pay taxes and to assist U.S. citizens in reporting and filing their income tax.

Although the U.S. citizen living out of the country has to file a U.S. tax return, and it is illegal to give up American citizenship for the sole purpose of avoiding taxes. The IRS tries to help American citizens avoid double taxation in both countries by allowing credits for foreign income taxes while living outside the U.S. This credit often offsets any U.S. tax you might owe. However, you have to file your U.S. tax return to claim the international foreign income tax credit.

Failing to file a U.S. tax return for any year will mean that the statute of limitations on a tax review for that year will never run out. So, if you live abroad for 15 years and return to the United States, the IRS may ask about your failure to file those returns and can require taxes based on an estimate of your income plus interest, which after several years may grow larger than the original tax owed. Whereas, if you file a tax return every year while you live abroad, the statute of limitations is only three years. This means the IRS cannot go back and audit those returns later than this three year period. Even if you have no income or do not owe taxes, you should still file a tax return. This way you eliminate any future issues with the Internal Revenue Service.

If you work for a foreign company and have a foreign social security number, pay foreign social security and other taxes, you won't need to pay U.S. Social Security taxes. However, if you are self-employed and you are using your U.S. credentials and do not have Social Security withheld from your earnings, you have to file a schedule C with your U.S. tax return. This will require you to pay a U.S. self employment tax on your net earnings after expenses. This is a 15.3 percent tax rate and is not reduced by any foreign tax credits the IRS allows.