Q: I’m a U.S. citizen who has been retired here in Germany for the last decade, and I haven’t filed a U.S. tax return since 2006. Am I in trouble with the IRS?
A: U.S. citizens and resident aliens, or green card holders, have an obligation to file a U.S. tax return every year, as long as they meet the minimum income threshold outlined at the beginning of the instructions to Form 1040. Most other countries tax you based on residency, not citizenship. If a Frenchman lives and works in Germany, he has to file a German tax return, not a French one. But Americans who retire overseas usually wind up having to file a return in the country where they reside and an American return because of their U.S. citizenship or resident alien status.
If you are a chronic nonfiler, sooner or later the IRS will likely catch you, especially if you are receiving a 1099-R from Defense Finance and Accounting Services every year listing your pension income. The IRS computers will eventually notice that no return was ever filed bearing the Social Security number that appears on the 1099-R, and the IRS will track you down. You may not wind up in jail for tax evasion, but you will be hit with a variety of penalties plus interest on any amount of back tax you owe.
It is almost always better to “come in from the cold” voluntarily. You can usually get right with the Government by filing tax returns for the last six years. Our tax assistance centers can prepare those returns for you. All you have to do is bring us the supporting documents.
The odds of the IRS catching chronic nonfilers who reside overseas have increased since the Foreign Account Tax Compliance Act was passed a few years ago. Beginning on Jan. 1, 2015, FATCA required foreign banks that have American account holders to report interest paid on those accounts to the IRS on Form 1099-INT.
Under the German-American Tax Treaty, American retirees who are ordinary residents of Germany must continue to pay tax to the U.S. on military and other governmental pensions, but they are exempt from having to pay tax on their Social Security benefits. Germany has the primary right to tax those benefits, and you should include them on your German tax return. You must still report the amount of Social Security you received on line 20a of your Form 1040, but on line 20b you should write “Exempt” and attach Form 8833 to your return explaining why you are exempt. Our tax center personnel have been trained on how to do this.
The situation is different for American military retirees who are not ordinary residents of Germany but who are stationed here under the NATO Status of Forces Agreement. They pay taxes on their military pensions to the U.S., and their Social Security benefits are also taxable by the U.S., not Germany.
A lot of Americans buy homes overseas and wind up renting them out. It comes as a big shock to some of them when they discover they must report that rental income on their American tax return. Many just assume that because the home is outside the U.S., they don’t have to report it on their U.S. tax returns. Others assume that because they are Americans, they don’t have to report that rental income to the German government either. You should never assume anything when it comes to taxes.
Likewise, many Americans living overseas have no idea they are required to file a Foreign Bank Account Report with the Treasury Department on Financial Crimes Enforcement Network Form 114 if they had more than $10,000 in a foreign bank or financial account at any time during the previous calendar year. If they are filing a federal tax return jointly with a foreign spouse, and that spouse, like most Europeans, likes to put money in the bank for a rainy day, that can be enough to trigger a FBAR filing requirement, whether or not the American spouse is a joint owner of the account.
By electing to treat your foreign spouse as an American for tax purposes and filing jointly so you can take a higher standard deduction and a personal exemption for your spouse, you expose your spouse to the long arm of American law. This can be a trap for the unwary. There are special streamlined procedures designed to assist taxpayers who should have been filing FBARs, in addition to not filing federal income tax returns, get back into compliance.
Editor’s note: This article is for general information only and does not constitute legal advice or create an attorney-client relationship. You should always consult an attorney for specific legal questions.