5 Tax Myths That Can Be Costly for Expats

Benjamin Franklin once famously said, "In this world, nothing can be said to be certain, except death and taxes." You might assume that by no longer living in the U.S. you’ve defied the tax half of this statement. That even if you have not yet cracked the secret to everlasting life, by skipping the country, you’re able to fly quietly under the IRS’s radar. However, you’d be very, very wrong. Here are five tax myths that can be costly for expats and digital nomads. (See also: 9 Ways Expats Can Maintain Their Credit Scores)

1. You’re out of sight, out of mind for the IRS

There are still an unsettling number of people who believe that if you no longer live in the U.S., you’re no longer liable to pay taxes here. Unfortunately, this could end up being a catastrophically costly mistake. The fact is that the U.S. is one of the few countries in the world that bases its tax system on residency and citizenship.

It doesn’t matter whether you live, work, and earn your income elsewhere. The same tax system still applies even if you’re paying taxes into your new country’s tax system. As an American citizen, you’re still obligated to file your tax returns in the U.S. every year if you have a certain level of income ($10,400 for a single person in 2017).

Filing doesn’t necessarily mean you’re going to actually have to pay taxes, as there are various exemptions you may qualify for (which I’ll mention below). But essentially, the U.S. government says that’s not for you to determine on your own, and your income must still be reported annually. Failing to do so will potentially lead to you being pursued by the IRS for moneys owed. You can be fined or even have your passport revoked.

2. You must renounce U.S. citizenship to lower taxes

Because you’re required to file taxes no matter where in the world you are, some people think that the only way to lower their taxes is to renounce citizenship. Though this might be true in some extreme instances, there are actually many ways to retain your citizenship and still lower your U.S. taxes.

The Foreign Earned Income Exclusion was designed to help you avoid double taxation, and will allow you certain tax exclusions provided you meet the criteria. These might include foreign earned income as well as foreign housing, and the IRS offers a simple way to check if you’re eligible through its Interactive Tax Assistant Tool.

To receive these exemptions you do actively have to claim them by filling out the relevant tax forms for the foreign earned income exclusion, so don’t be fooled into believing that because you qualify, you don’t have to file for them. You also need to declare your earnings in full; this is not an opportunity to not report the earnings that may be excluded. (See also: 8 Tax Return Mistakes Even Smart People Make)

3. If none of your balances in foreign bank accounts are over $10,000, you don’t have to declare them

The Report of Foreign Bank and Financial Accounts (FBAR) regulations are often misinterpreted. Some people take them to mean that if none of your foreign bank accounts have a balance of over $10,000 dollars, you don’t have to report them. In reality, the rules clearly state that you must submit an FBAR if "the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported."

This means that if you have one or more foreign accounts, you need to add the balances together rather than count them separately. It’s not just bank accounts, either, and includes any "bank account, brokerage account, mutual fund, trust, or other type of foreign financial account." It’s also not limited to your own accounts; it covers any account in which you have a financial interest or have signature authority over.

If at any stage throughout the year they cumulatively totaled more than $10,000, you need to fill out the FBAR. Failure to do so can be punishable with a fine of up to $100,000, or up to 50 percent of the balance of the accounts at the time of the violation, for each violation.

4. Failing to file tax returns for many years will mean you owe back taxes

There are a significant number of U.S. citizens who have lived outside the country for many years without realizing they need to pay taxes. For those people, it can be daunting to think they suddenly have to start filing taxes again and declare earnings to cover the entire period of living outside the U.S. Nobody wants to become liable for thousands of dollars of back taxes, and it can be tempting to think you’ve gotten away with it for so long, so why change now?

Luckily, in recent years, the government has made it far easier to manage taxes owed with introduction of what is known as streamlined filing compliance procedures.

Essentially, you have to certify that your nonpayment of taxes was due to "non-willful conduct" rather than deliberate avoidance, and you’ll be able to come clean consequence-free. It’s beneficial for both the government, who gets taxes they otherwise wouldn’t be collecting, and the taxpayer, who no longer needs to live in fear.

5. The IRS is never going to catch you

Even if you’re living off the grid on some far-flung desert island and haven’t been back to the U.S. in years, if you have a bank account, you’re probably traceable. Under the Foreign Account Tax Compliance Act of 2010 (FATCA), foreign financial institutions must pass on data relating to the assets of any of their clients who are U.S. citizens. Your financial records are transparent, so regardless of whether you report your accounts or not, the IRS can still access them.

Though you might think it’s unlikely that you’ll be investigated unless you’re a wealthy individual, don’t bank on it. The IRS has explicitly claimed it’s getting harder and harder to avoid detection, and if you’re still operating outside of the regs, the net is closing in.

It’s not worth it to try to avoid the IRS, even if you’re living overseas. Facing up to your responsibilities will ultimately be easier in the long run.

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Here's What to Do If You Get Audited

We often exaggerate the phrase, "My worst nightmare," but when it comes to getting audited, it’s true. Audits are many people’s worst nightmare — but they don’t automatically have to mean financial disaster. To help navigate the unwelcome process, consider these important steps to take as suggested by tax professionals.

1. Don’t panic

A lot of folks’ first response to receiving their audit notice is to panic. Just the word "audit" has the ability to throw everything into a tizzy. But in all probability, if you’ve reported your taxes accurately (or at least tried to), the situation is likely not as bad as you think.

"It can be easy to fly off the handle and make what can be simple requests for information into a pressure-filled, stress-inducing scenario," says certified financial planner Joel Ohman. "This need not happen if you have someone — a CPA, tax attorney, or other trusted professional — representing you and counseling you."

Slow down, take a deep breath, and call whoever does your taxes. Trust them; rely on their advice.

2. Read the notice carefully

Take a good look at the audit notice you received. Many audits are desk audits or computer document-matching audits rather than the complete tax return audits done in-person.

"If the audit request is a document-matching audit, they will typically ask you to verify certain lines on the return," explains Grafton "Cap" Willey, CPA and managing director of the New England division of CBIZ MHM. "Very often they will propose an adjustment based on the information they have received. They will state that you reported ‘such and such’ and they have additional documents that they do not see reported."

3. Prepare the required documents

Documentation is the key to success in audits. Provide organized documents such as 1099s, K-1s, W-2s, and canceled checks, and reconcile them to the amounts claimed on the return. If you do not have adequate documentation, it’s more likely that you won’t get the deduction.

"IRS information is not always correct, so look it over carefully and make sure that they have the correct information," Willey adds. "Investment gains and losses are often misrepresented and very often the IRS will assume a zero-cost basis on unreported transactions. Providing corrected information will usually satisfy them."

When going through your documentation, if you come up with more deductions than you claimed, don’t be afraid to submit them in your response. The IRS can be very strict on accepting documentation for charitable donations and business expenses, however.

4. Submit your documents on time

Don’t make matters worse by missing deadlines. An audit is a serious matter that can result in heavy fines, and you don’t want to put more stress on the process by being uncooperative. Follow the guidelines and get your documents submitted by the date expected. (See also: The Easiest Way to Avoid a Tax Audit)

5. Don’t let your mouth get you in more trouble

The IRS is very good at making people feel nervous about being audited, and when people are nervous, they tend to ramble — sometimes to harsh consequences.

"Remember the IRS’s job is to appropriate your money for government needs, and your job is to justify why you should keep the money yourself," explains CFP Brent Dickerson, owner of Trinity Tax Advisory. "They are not your friend, and they are not there to help you keep money for yourself; many people in an audit situation fail to remember this fact. They let down their guard and often say things that they don’t even realize can bite them. Therefore, it’s in your best interest to have a representative work on your behalf with the IRS."

6. Bring your CPA with you to your in-person audit

If the audit is an in-person audit, consider bringing along a tax professional to represent you at the audit.

"The IRS is not afraid to try to intimidate a taxpayer representing themselves," Willey says. "A tax professional that has experience with tax audits should be aware of the rules and know when the agent may be fishing for issues. Very often, giving a tax professional a power of attorney authority may avoid the taxpayer from having to sit down with the IRS agent, which many taxpayers would like to avoid."

Make sure your records are well organized and well documented; make it easy for the agent to follow. If they have confidence that you’re presenting good documentation, they will be more likely to accept what is presented to them.

7. Don’t be afraid to disagree and negotiate

Sometimes a tax audit is a negotiation — you may have to concede to some changes on smaller items in order to not have big changes on larger items. It really depends on the agent. Some agents nitpick minor items, while other agents go straight for the big issues.

"In my experience, IRS field agents tend to rigidly apply the law in favor of the Treasury," says Matthew T. Eyet, Esq. of Sandelands Eyet LLP. "If at the end of the audit you think the agent got it wrong, file a protest to take your case to the Office of Appeals where the appeals officers are typically more taxpayer-friendly in their analysis."

In addition, he adds, unlike field agents, appeals officers are allowed to consider the hazards of litigation when negotiating a settlement. This almost always means a better result for you.

8. Hire an enrolled agent if you’re caught red-handed

If you’ve really dug yourself a hole and committed criminal acts by submitting fraudulent taxes, you’ll need more than a CPA to help you. An enrolled agent is a tax expert and recognized by the IRS as having unlimited right of representation. They’re your best hope of the least amount of recourse.

"If you are facing counts of criminal charges, you’ll need a lawyer," says Dickerson. "If your business is being audited or if you have a sole-proprietorship with lots of accounting needs, then you may want to opt for a CPA. All of these professionals have their own specialties when it comes to tax and each is able to represent clients in front of the IRS — but only attorneys can represent in cases of criminality." (See also: 10 Reasons You Should Really Fear an IRS Audit)

9. Pay what you owe ASAP

You want this situation to be over, and the best way to accomplish that is to pay what you owe immediately. If you don’t, you run the risk of added interest and penalties with late fees on top of that.

If you don’t pay the balance in full in the first 21 days of receiving notice of what you owe (for balances less than $100,000), penalties begin accruing. The faster you can get this squared up and put behind you, the better.

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5 Creative Ways to Relieve Stress During Tax Season

Tax season is upon us, which means millions of Americans will be stressing out about filing their IRS forms correctly and whether they will receive a refund this year.

But just because getting ready for Tax Day can be emotionally taxing (see what I did there?) doesn’t mean it has to be. In fact, you can find fun ways to de-stress while preparing your taxes and waiting on your refund check. Here are five ways to let off some steam this tax season. (See also: 6 Moves You Should Make Now for Your 2018 Taxes)

1. Have a tax-themed movie marathon

Watching movies is a time-honored way of getting out of your own head for a little while. If you choose comedies to watch, you’ll reap even more stress-relief benefits as laughter releases neuropeptides that help fight stress and cause the body to release its own painkillers. Put that together and it’s clear that a tax-themed comedy movie marathon could be just ticket to feeling less overwhelmed by tax season.

Can’t think of any tax-themed comedies? There’s a surprisingly large number of films that fit the bill:

• Stranger Than Fiction features Will Farrell as a tax auditor who discovers that he is actually a fictional character in a famous author’s book.

• The Blues Brothers kick off their mission from the big man upstairs when they learn the orphanage where they were raised owes $5,000 in back taxes and will have to close if they can’t pay the IRS.

• Happy Gilmore begins with the title character’s grandmother owing $270,000 in back taxes. High jinks ensue as Gilmore (played by Adam Sandler) realizes his ice hockey skills make him an excellent golfer.

• The Producers shows what happens when a Broadway producer and his accountant realize they can keep all of their investors’ money if they intentionally produce a flop. This tax fraud is a major problem when their flop turns out to be a smash hit.

2. Write a profane limerick about paying taxes

While simply shouting "You forking IRS buttheads!!" (or something a little more profane) each time you get frustrated filling out your 1040 form will certainly help you to relieve your tax-related stress, taking the time to really savor the profanities you’d like to spout about your annoyance can make this even more fun. Plus, expressing your feelings verbally allows you to blow off steam and release those feelings so they aren’t stuck in your mind.

Limericks are traditionally both profane and funny, and you can challenge your friends to each come up with their own tax limericks. Whoever comes up with the funniest or most foul-mouthed poem wins.

3. Dance it out

There are a surprising number of tax-related songs out there, which means having a tax dance party would be brilliant way to dance your stress away. Not only does dancing get your heart rate up, which is an immediate mood booster, but cutting a rug to the following songs can remind you that tax woes are so universal that even famous musicians have to deal with them. (See also: These 7 Exercises Are Scientifically Proven to Increase Happiness)

• "Taxman" by The Beatles

• "Mo Money Mo Problems" by The Notorious B.I.G.

• "Sunny Afternoon" by The Kinks

• "Movin’ Out" by Billy Joel

• "Money" by Pink Floyd

4. Host a potluck

Socializing is an important part of reducing stress, and if you’re worried about money because your tax bill is about to be due, hosting a potluck can be a great way to spend time with friends without emptying your wallet, or theirs. Each person can be assigned a dish, or bring desserts or beverages, and you can collectively commiserate over how you all wish you could stick it to The Man. (See also: Throw an Awesome Potluck Dinner With These 6 Easy Tricks)

5. Use extra IRS forms to make papier-mâché

Tax time is an ideal opportunity to get back in touch with your artistic side, and if you can use some of the infuriatingly complex tax forms to create your work of art, all the better. Creating a papier-mâché bowl or vase out of your excess IRS forms can feel immensely satisfying while also relieving your tax-related stress.

If it’s been awhile since you last made papier-mâché, don’t worry. It’s easy! Gather together your excess IRS forms, as well as some extra newspaper or other scrap paper to make sure you have enough paper for your project. Find a large plastic bottle or other large base for your papier-mâché project. Tear or cut the paper into one-inch wide strips. Mix one part water to three parts white glue. Dip your paper strips in the glue mixture, and start layering those bad boys on your base, placing no more than four layers of paper at any spot.

Let it dry completely, pull the papier-mâché shell from the base, and start painting it however you like. Consider painting the words "I survived filing my taxes!" across it and making it as a keepsake of this year’s tax season.

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What You Need to Know About Canceled Debt and Taxes

Imagine having years of punishing credit card debt canceled and gaining the clean slate you’ve always wanted. Then, out of nowhere, you receive a form in the mail that says you actually owe money for having that debt wiped away.

That situation happens all the time to consumers who have had part or all of a debt forgiven. The reality is, canceled debt may help you regain control of your finances, but the IRS still wants its share of what it sees as income you received. (See also: 12 Things You Should Know About the New Tax Law)

How debt is canceled

To understand the tax ramifications of canceled debt, it helps to know how this phenomenon works in the first place. How does someone get their debt canceled?

According to Steven J. Weil, president of RMS Accounting in Fort Lauderdale, Florida, debt can be forgiven on credit card balances, mortgages, auto loans, or nearly any other type of loan. This debt can become canceled in a variety of ways. One way is when consumers use a debt settlement company to negotiate a payment of less than they owe. (See also: 4 Ways to Negotiate Credit Card Debt)

Another example is when consumers who owe more than their homes are worth get their mortgage company to forgive the remaining balance during what is called a "short sale." A short sale is when the net proceeds from selling the property fall short of the debts secured by liens against the property. All the lien holders must agree to accept less than the amount owed on the debt in order for a short sale to go through.

Forgiven debt doesn’t just go away, says Weil. "Whether it’s consumer debt, auto debt, or any other type of debt, it becomes income to the consumer when they don’t pay off their debt. The government rectifies this situation by charging taxes on forgiven amounts."

Unfortunately, consumers don’t always know they are required to pay income taxes on forgiven debt. So, imagine their surprise when they receive a 1099-C in the mail that could lead to a larger tax bill.

What the tax law says

Creditors and debt collectors that accept at least $600 less than the amount you owe them are required by law to file 1099-C forms and send consumers a copy to use when they file their taxes.

As Weil notes, the form should clearly list the amount of debt you had forgiven — not the amount of debt you once owed.

Weil uses the following example to explain how forgiven debt is figured. Imagine you ran up your Visa card with a $10,000 balance (including principal, interest, and late fees) and cannot keep up with the monthly payments. After the debt is sent to collections, you work with a debt settlement company to reach a settlement that says you’ll pay $3,000 to have the entire debt forgiven. In this case, the $7,000 in forgiven debt would end up on the 1099-C, says Weil. This form is then sent by the creditor that accepted the settlement to the consumer.

At least that’s the way it should work. In some cases, consumers don’t receive the 1099-C for whatever reason. But not receiving the form doesn’t remove your liability, says Weil.

When your debt is forgiven, it becomes income to you — even if the creditor you work with fails to send a 1099-C. "If you don’t get the form, you need to call the creditor and ask for it," says Weil.

Weil also says that, when somebody tells you they will forgive your debt, you need to get documentation of the event in writing. An official letter from the creditor acknowledging your forgiven debt amount will suffice when you’re filing your taxes in the absence of a 1099-C, he says. Further, getting the agreement in writing will also protect you down the line if the details of your forgiven debt get jumbled somehow between your creditor and the IRS. (See also: What Happens If You Don’t Pay Your Taxes)

Exceptions to the rule

Weil notes that the IRS offers several exceptions that let consumers in certain financial situations avoid paying taxes on forgiven debts. Those exceptions include insolvency. If after your debt is forgiven you have no cash or assets to sell to pay taxes on your debt, you won’t have to pay income taxes.

But note that the exclusion applies only to the amount by which you were insolvent. So if you had $10,000 of credit card debts canceled at a time when you had $2,000 in assets, the insolvency amount is $8,000. You’ll report $2,000 ($10,000 minus the $8,000 insolvency amount) as income on your tax return.

Also, if debt forgiveness makes you solvent, then it’s taxable, notes Weil.

Other exceptions that let you avoid paying taxes include debt discharged in bankruptcy, debt given as a gift by a friend or family member, and certain business real estate and farm exclusions, he says.

If you’re curious whether you’ll qualify for an exclusion, Weil says it’s best to speak with a tax professional who can look at the details of your unique tax situation.

When consumers aren’t informed

If you’re a consumer who has been hit with this surprise tax in the past, you may be wondering why you weren’t informed of your tax liability. According to Weil, it’s up to consumers to educate themselves on the best ways to handle their debts, including forgiven debt. Ideally, the different companies we work with will warn us about taxes we might owe, but you should never count on it.

Weil says debt settlement companies in particular should really be doing their part to educate consumers on their tax liability. These companies, which may be for-profit or nonprofit, usually tell consumers to stop paying their bills and save money for debt settlement in a joint escrow account instead. This way, when (or if) the debt settlement company strikes a deal to settle your debts, you’ll have the cash on hand to pay the agreed-upon settlement amount.

Considering the fact that debt settlement companies can charge high fees and are supposed to be on the side of consumers, one would think these companies would lay out all the details for those they help. But they don’t always.

"There’s a lot of nondisclosure," says Weil. Because of this, "consumers should be very careful of debt consolidation and settlement agencies, particularly those that are for-profit."

The bottom line: You may owe taxes on forgiven debts, and you may receive a 1099-C in the mail from your creditor. If you don’t receive the form, the onus is on you to figure out your tax liability.