Paying back taxes to the US. How deep have I dug my hole?

Question

I'm an American citizen living in Taiwan for roughly 8 years now. In that time I have been employed by my Taiwanese father-in-law in the family owned business and have filed only Taiwan taxes. I have not filed US taxes since I left the US.

My Taiwan based income is not very high due to the fact that all of my living expenses are covered and claimed by the family business. I don't particularly have any plans to move back to the US, but I have a feeling I'm digging myself into a deeper hole each year I don't file. As far as I know, I've been completely off the books since I left. None of my credit reports list any employment information beyond 8 years ago.

However, I cleared out my US based 401K last year, so I'm sure I'm back on the radar now. This is part of the reason I want to start filing again. I need to pay a percentage of the 401K I cleared out before the IRS comes after me.

On a side note, while attempting a routine international back transfer from my Taiwanese bank back to my US bank about a year ago and was handed some forms pertaining to the Foreign Accounts Tax Compliance Act (FATCA). I actually had to sign a release allowing my Taiwan based bank to share my account information with the IRS in order to complete my bank transfer. So if the 401K didn't raise any red flags, signing the FATCA release probably did.

Anybody know where to start cleaning up this mess of procrastination I've created?

Answer 1

You would probably want to talk to a EA/CPA licensed in the US.

My Taiwan based income is not very high due to the fact that all of my living expenses are covered and claimed by the family business.

Your living expenses that are covered by the family business - are part of your income. The fact that you got it in milk and cookies from your inlaws and not cash doesn't really matter.

That said, if your total compensation (including the living expenses) is under the FEIE (Foreign Earned Income Exclusion), you'll probably end up with no tax to pay.

The 401(k) withdrawal however doesn't fall under the FEIE, so that will be taxable based on your marginal rate (which is calculated based on your total income, regardless of the exclusion) + penalties.

If your unfiled years result in no tax liability - then it's probably not a big issue.

Keep in mind that you probably also need to file FBAR (bank accounts report to FinCEN). That can actually land you in more trouble than the tax returns, if not filed on time or correctly. So when you talk to that EA/CPA - ask about that as well, as there may be some ways to mitigate problems.

The penalties for "fixing it" once caught, especially with FBAR, are much higher than when you voluntarily try to come into compliance. Since FATCA has probably lead to you being exposed to the IRS/FinCEN - you should probably try to back-file before they come to you with questions.