You work abroad, you live abroad, you pay taxes (in your country of residence) abroad. You are not using the roads, schools, or other government services back in the U.S. so why would you bother filing taxes, right?
Depending on your income, you might not owe any taxes, but you still have to file. Of course, no one tells you this when you are 22 years old, fresh out of college, and hopping on a plane to travel the world for a year or two while teaching English. Indeed, it’s easy to understand how you, like me, might not file for a year or two. …Or four.
Yes, that’s right. I didn’t file for four years in a row. And I knew it was something I was supposed to do, but… I just didn’t. I knew I wouldn’t owe anything, so it was just such a bummer to try and motivate myself to sit down and go through that paperwork when I could be out partying ‘Gangnam style’ (I actually did live in Gangnam during this period).
Getting married, however, made me feel like I should start being responsible, and we were talking about moving back to the US in the near future, so while on a trip to visit family one Christmas, I made a stop at H&R Block, and did all four years of back taxes at once, plus the current year just to get it over with. This put a significant dent in my bank account (I think about $500), but I was all squared up and could breathe easy the next time I went through border security.
In the ensuing 17 months in which I didn’t have to worry about taxes, I had plenty of time to think about how simple the paperwork turned out to be. In fact, I was the one that had to explain to the tax preparer (who happened to be one of my former High School Football coaches although he didn’t remember me) about my situation, that I am entitled to an exemption and wouldn’t end up owing anything, and that this is all fairly routine and totally not a big deal in spite of his confusion.
I resolved not to pay someone to do my taxes again.
Sometime around the next June 10th (US citizens abroad get an automatic 2-month extension), I tackled those tax forms and got it done and mailed.
The first sign of trouble came the following August. I received a rather polite email from someone from the IRS asking me to clear up a couple things on my tax form. I don’t remember what those things were, but they are not important to the story. What is important is what happened next:
I replied to the letter, in writing, directly answering the questions. In addition, I noted that I would soon by moving to a new residence and asked them to please contact me at my office address if follow-up is needed.
The next few months were very busy. We did move, not only to a new apartment but to a new town, plus we found out we had another child on the way.We had some trouble finding new tenants for our old apartment and we were back and forth quite a bit between the two cities. The Fall semester came and went in a blur, the holidays flew by, and then one day in mid-January I was going through some things that hadn’t been unpacked. At the top was a pile of mail that we had grabbed during one of our visits. I would have tossed it aside were it not for the three bold letters in the return address spot:
I had forgotten all about our previous correspondence until that moment. It all came rushing back to me as my face flushed. I sensed trouble.
I opened the letter, dated several months in the past, and read something to the effect of:
“Mr. Ward, that letter we sent you a couple weeks ago was a mistake. Please disregard it. We have adjusted your tax return for you and re-filed. You now owe us thousands of dollars.”
That’s not even the worst part.
“You may dispute this, but only if you do it in the next couple of weeks. Oh yeah, and by the way, if you don’t send your payment in full by that same day then you will automatically be audited.”
How is it possible I owed that much money? Did they just pull it out of thin air? Well, not exactly. When the IRS re-files on your behalf because of a mistake they detect, they do not give you any exemptions.
Let me say that last part again:
They do not give you any exemptions.
This includes the Foreign Earned Income Exemption. Which, by the way, is a prerequisite for that “automatic” extension that I mentioned before.
This sent me into panic mode. My dreams of returning to the US with my family were dashed. I was destined to be forever on the run from Big Brother. Or so I thought.
After calling every friend I could think of that might know someone that could help me get out of this, through the grapevine I heard about a guy (Allen at Tax Uncomplicated) that used to be an expat in Korea himself and understood the special considerations for our taxes. Allen was sympathetic and reassuring, which soothed my nerves right away. He explained that getting square with the IRS would be entirely doable, but it would take time. He recommended the following three courses of action, in order:
- Paying some (as much as possible) amount to the IRS ASAP (mostly an effort to show good will). I paid less than $500 of my multi-thousand dollar tax bill.
- Having him re-file that year’s taxes along with a brief apology and explanation of the confusion.
- After steps one and two, waiting several weeks and then filing an “Abatement Letter,” which essentially presents evidence and makes your case that the IRS made an error, and requests a refund.
I was also a nervous wreck through all of this. I woke up in the middle of the night occasionally thinking we’d never be able to repatriate because they wouldn’t approve a visa for the spouse of a tax evader, would they?
Over the coming weeks, we communicated by email and Skype to build our case. I had scanned all the letters and documents, we noted discrepancies in mailing dates, and even figured out that their letters were taking an unusually long time to get to Korea, inexplicably routing through France. We had a rock solid case ready to go.
We didn’t need any of that stuff though because out of the blue I received another letter from the IRS simply stating that my re-filed return had been accepted and my new owed amount was: $0.00.
I was in the clear.
Through all of this, we were able to figure out what the issue was that set off the IRS’ red flags and it had nothing to do with my income or it’s source whatsoever. It was my filing status. I am married with children and I am the sole wage earner in the family. The IRS, however, requires you to give your spouses social security number when filing as married. My wife is not a US citizen and has never lived in the U.S., so why would she need a SS#?
Since I couldn’t file as “Married” without it, I checked “Single or Head of Household,” because I believed that to be factually correct (as the sole wage earner), and then listed my wife as a dependent.
But the IRS isn’t as interested in my “facts” as they are in their protocol. My return was flagged, pulled, and re-calculated without any exemptions.
You may be wondering what happened to the money I sent as a payment towards my errant bill. I should be receiving a refund of that as well. Allen, who does all my taxes from now on, filed for a refund of that money when he filed my most recent return.
If there is a lesson to be learned from this story, it’s that it is very easy to get a target put on your back by the IRS even when you are trying to do everything right. After going through all of that I now look at hiring someone to do my taxes very differently. Most people wouldn’t try to cut their own hair or make their own clothes. So why would you try to take the time to do something as important and time-consuming as your own taxes? When you consider saved time along with the monetary cost, it is probably much cheaper than you would expect.