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Failure To File Tax Returns And The Foreign Earned Income Exclusion

Transcript of the above video:

As the title of this video suggests, we are discussing Foreign Earned Income Exclusion and Tax Returns. I thought of making this video after reading a recent article from ZeroHedge. I believe they were referring to the Epoch Times, the article is titled: IRS to retrieve potentially hundreds of millions of dollars from Americans who failed to file tax returns. Quoting directly: "The Internal Revenue Service (IRS) announced a new effort aimed at boosting tax revenue from taxpayers who haven't filed returns for several years with the initiative expected to net at least hundreds of millions of dollars." Okay, a couple of things going on here, and I urge those who are watching this video, go read that article in detail. A lot of information in there and worth noting, but for the purposes of this video what are we talking about? 

Well we are talking about is failure to file your tax return and a lot of people believe that if they make under a certain amount of money as an expat, someone living outside the United States, especially someone living outside of the United States for 335 days per calendar year or longer, that they are automatically availing themselves of the Foreign Earned Income Exclusion meaning "oh I make less than presently I think the ballpark figure is $120,000 a year, I'm therefore covered by the Foreign Earned Income Exclusion."  

Well yes, that may be true only if you file a return. So failure to file a tax return, just because you make less than the exclusion threshold doesn't mean you don't have to file the return; you have to file the return to basically have the exclusion recorded if you will. What do we mean by this? Well what I mean to say is if you don't file a return at all and the IRS then becomes aware of that and they audit you, come after you effectively, then you are in a very precarious predicament because the failure to file the return can result in them taking the position that well we are not going to accord you the Foreign Income Exclusion because you didn't file a return; you didn't even maintain sort of basic compliance if you will. 

So the thing to take away from this video is to understand first of all, there is a Foreign Earned Income Exclusion; it does exclude income that is earned abroad under a certain threshold and more importantly, one needs to file a return in order to enjoy that benefit as failure to file a return, can result in basically the non-recognition of the exclusion in the event of like an audit for example. The other thing to keep in mind as that article goes on to point out, is that IRS seems increasingly concerned about those who have failed to file returns in the past and for this reason it looks like they are increasing their enforcement efforts and as we discussed in prior videos; they have now more resources and more money and more funding and now apparently more personnel that it seems like they are more capable of doing this. 

So the thing to keep in mind moving forward is there is a very real possibility that we will see more enforcement initiatives for failing to file tax returns. Those who think that they may be able to avail themselves of the foreign earned income exclusion would be wise to bear in mind the fact that that is a possibility. Enforcement efforts have been ramped up and it is a good reason that if you have got back taxes that have not been filed, now would be a really good time to think about doing that.