Many Americans living and working abroad forget to file their US tax returns. Others know about the obligation, but disregard it. What’s the worse that can happen, right? The short answer is: IRS penalties.

3 IRS Penalties (for not filing or paying)

Failure-to-File Penalty

The failure-to-file penalty is 5% of the unpaid tax amount (per month). The maximum penalty is capped at 25%. Furthermore, there is a minimum penalty of either $135 or 100% of the unpaid tax amount (whichever is smaller) when the tax return is filed more than 60 days beyond the normal due date or extension date.

Failure-to-Pay Penalty

If you do not file, you may also be subject to a failure-to-pay penalty. This penalty accrues at 0.5% of the unpaid tax amount (per month). The maximum penalty is capped at 25%. When both the failure-to-file and failure-to-pay penalties apply, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty (basically, you are only subject to the more onerous failure-to-file penalty). The clock for the failure-to-pay penalty starts ticking on June 15, the normal due date for US expat tax returns. However, interest charges start accruing on April 15.

The IRS may waive the failure-to-file or failure-to-pay penalties if you can show reasonable cause (i.e., not due to willful neglect).

Underpayment Penalty (self-employed)

US income tax is based on “pay-as-you-go” (taxes must be paid as you earn or receive your income during the year). Since self-employed individuals do not have tax withheld by an employer, they generally need to pay estimated tax (e.g., on a quarterly basis). If estimated tax payments are insufficient by $1,000 or more, you may be subject to an underpayment penalty (actual rules are bit more complicated).

For general information on US expat taxation, please read: US Taxes for Americans Living Abroad – Ultimate Guide.