If you’re a U.S. citizen living outside the country, you already know that the American tax system follows you wherever you go. Whether you’re working in London, raising a family in Tokyo, or retiring in Sydney, you remain subject to the full scope of U.S. tax laws - even as you adapt to the legal, financial, and tax systems of your new home. This unique situation creates a tangled web of compliance burdens, reporting requirements, and potential penalties that can feel overwhelming.
In its latest Annual Report to Congress, the Taxpayer Advocate dedicates an entire chapter to this issue, and the findings are clear: the U.S. tax system is not built for expats. It’s built for people living inside the U.S., and everyone else is expected to simply “figure it out.”
This blog breaks down the report’s key insights in plain language - what’s broken, why it matters, and what changes could finally make life easier for millions of Americans abroad.
Why U.S. Expats Face Unique Tax Challenges
Unlike most countries, the United States taxes its citizens based on citizenship, not residency. That means you must report your worldwide income and pay any tax due, regardless of where you live or earn income. You’re also required to report foreign bank accounts, assets, gifts, inheritances, and interests in foreign entities. The interaction between U.S. tax laws and your country of residence’s tax system adds layers of complexity, often resulting in confusion and frustration.
In this regard, the Report notes that:
- The U.S. government estimates there are about 4.4 million citizens living abroad, though some sources suggest the number could be much higher (8-9 million).
- For tax years 2020–2023, U.S. citizens living abroad filed approximately 3.5 million individual income tax returns.
- The majority of expat filers are not wealthy: in 2023, about 56% reported adjusted gross income (AGI) under $25,000, and less than 4.2% reported AGI over $400,000.
The Complexity of Filing as an Expat
The Internal Revenue Code (IRC) is notoriously complex, and expats must navigate not only U.S. tax law but also the laws of their country of residence and any applicable tax treaties. Treaties themselves can be lengthy and difficult to interpret - for example, the U.S.-Canada income tax treaty is 190 pages long.
In this regard, the Report also notes that:
- Expats often need to file forms like Form 1116 (Foreign Tax Credit) and Form 2555 (Foreign Earned Income) at much higher rates than domestic taxpayers.
- In recent years, over 30% of expat returns included Form 1116, compared to less than 4% for domestic filers.
- Over 28% of expat returns included Form 2555, while virtually none of domestic returns did.
Onerous International Information Reporting
On top of income tax filings, expats face a host of international information return (IIR) requirements. These include:
- FBAR (Report of Foreign Bank and Financial Accounts): Required if your foreign accounts exceed $10,000 at any time during the year.
- FATCA (Foreign Account Tax Compliance Act): Requires reporting of foreign financial assets above certain thresholds.
- Forms 3520 and 3520-A for foreign gifts, inheritances, and trusts.
- Form 8621 for Passive Foreign Investment Companies (PFICs), which can include mutual funds and foreign retirement account investments.
Failure to file these forms, even if you owe no U.S. tax, can result in harsh penalties. For example, FATCA penalties start at $10,000, and FBAR penalties can reach $10,000 for non-willful violations or much higher for willful violations.
Real-Life Example: Sue in Australia
The Report gives the following real-life example:
Sue, a U.S. citizen, has lived and worked in Australia for many years after marrying her Australian husband, Sam. As a dual citizen, Sue pays Australian income taxes on her wages but also remains subject to U.S. tax laws. They have been advised their income is always less than the foreign earned income exclusion. They have joint checking and savings accounts in an Australian bank, and on various paydays the combined balance of their joint accounts exceeds $10,000 USD. Sue participates in an Australian superannuation, a compulsory system for retirement savings. Three years ago, she inherited some stock shares from her Australian aunt, which she keeps in the same brokerage house that maintained her aunt’s account. Sue and Sam have not filed a U.S. income tax return or an FBAR.
Sue eventually learns that because she is a U.S. citizen, she must also file a U.S. tax return to report her Australian income, with Forms 3520, 3520-A, 8938, and 8621 (depending on the investment in the superannuation). They also must electronically file FinCEN Form 114 (FBAR) using FinCEN’s BSA E-Filing system. If they file tax returns, they may owe U.S. taxes and penalties thereon. They would also be subject to foreign trust penalties for failing to disclose Sue’s Australian pension plan, FATCA and FBAR penalties, and possibly foreign gift penalties for failure to disclose her Australian inheritance that is not subject to tax.
For taxpayers like Sue, our strong recommendation would be to participate in the IRS Streamlined Procedures amnesty program to get caught up on her filing obligations. The Report does consider this as a potential solution, although its focus is more on the challenges facing expats rather than the amnesty options that may or may not be available depending on the circumstances.
IRS Support: Limited and Inaccessible
Given the many challenges of filing while abroad, expats often need help preparing their returns. The Report states, in this regard, that IRS-supported free programs like Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) are virtually unavailable outside the U.S. and its territories.
It also notes that:
- Communication with the IRS is difficult due to inconvenient phone hours, long wait times, and the lack of toll-free or local-rate numbers for international callers.
- Language barriers are increasing: IRS translation services have been limited to just seven languages, and most forms are only available in English.
- The IRS has introduced an international chatbot and live chat feature, but these are only available in English and Spanish, and their usefulness is limited.
IRS Systems: Not Designed for Expats
The Report notes further that U.S. expats face barriers with IRS systems:
- Creating an online IRS account is often impossible due to identity verification requirements, lack of U.S. phone numbers, and geo-blocking.
- Electronic payments and refunds are limited; the IRS cannot accept payments from or issue refunds to foreign bank accounts except in rare cases.
- Many common expat forms are only available for paper filing, and the IRS e-filing system closes before the December 15 extended deadline for expats.
- IRS address and ZIP code systems don’t accommodate international formats, causing issues with disaster relief eligibility and other services.
Recommendations for Change
The National Taxpayer Advocate urges the IRS and Congress to make several improvements:
- Launch awareness campaigns and provide plain-language guidance for expats, especially regarding retirement plans and reporting exceptions.
- Provide alternative identity verification pathways for online IRS accounts.
- Expand electronic payment and refund options for expats.
- Increase e-filing availability and simplify extension requests.
- Align e-filing timelines with international deadlines.
- Eliminate duplicative reporting requirements (such as reporting the same account on both FBAR and FATCA forms).
- Exclude “same-country” accounts from FATCA reporting for bona fide residents.
