IRS Penalties for Expats — Which Apply, How to Avoid Them
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
IRS penalties for expats fall into two groups: penalties computed on tax owed, which are zero when the return shows no balance, and penalties attached to information returns, which apply regardless of tax. Americans abroad are rarely hurt by the first group and often by the second, because fixed-penalty forms exist only for foreign accounts, companies, and gifts.
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What are the penalties tied to tax owed?
- Failure to file: 5% of the unpaid tax per month, up to 25%.
- Failure to pay: 0.5% of the unpaid tax per month, up to 25%. For expats who qualify for the automatic June 15 extension it doesn't start until after June 15, but interest still runs from the April due date.
- Accuracy-related: 20% of an underpayment caused by negligence or a substantial understatement — rising to 40% when the understatement involves an undisclosed foreign financial asset.
- Interest on any balance, which is not a penalty and is never waived.
An expat who owes nothing after the exclusion and credits owes no failure-to-file or failure-to-pay penalty, however late the return. That is why many late expat returns cost nothing — but it is also why people wrongly conclude the other penalties don't matter.
What are the information-return penalties?
These are fixed amounts, per form, per year, with no connection to tax owed:
- FBAR: an inflation-adjusted amount per late report for non-willful failures (in the low five figures); for willful failures, the greater of a six-figure amount or 50% of the account balance.
- Form 8938: $10,000 for failure to file, plus continuation penalties after IRS notice up to $50,000.
- Form 5471 / 8865 / 8858 (foreign companies and partnerships): $10,000 per form per year, plus continuation penalties.
- Form 3520 (foreign gifts and trusts): 5% of the gift per month up to 25%; 35% of distributions from or transfers to a foreign trust.
- Form 8621 (PFICs): no fixed penalty, but the statute of limitations on the whole return stays open.
A single unfiled Form 5471 for a small one-person company abroad, over several years, can exceed the company's entire profit.
Which penalties actually get assessed on expats?
Form 5471 penalties are assessed automatically when the form is filed late — the IRS computer issues the notice before anyone reviews the reason. For late-reported foreign gifts and bequests on Form 3520, the IRS has reviewed reasonable-cause statements before assessing since October 2024. FBAR penalties are assessed after examination and are far less common for people who come forward. Failure-to-file and failure-to-pay penalties appear on any late return with a balance. The 40% accuracy penalty is reserved for underpayments tied to hidden foreign assets.
How are penalties removed?
Three routes:
- Reasonable cause. A written explanation showing you exercised ordinary care — reliance on a professional, unawareness of an obscure requirement combined with prompt correction, serious illness. It works for most information-return penalties when the facts support it, is the standard response to an automatic Form 5471 assessment, and is the statement to attach to a late Form 3520.
- First-time abatement. An administrative waiver of failure-to-file and failure-to-pay penalties for a taxpayer with a clean three-year history. It generally does not apply to information-return penalties.
- The Streamlined procedures. For non-willful expats who are behind, three years of returns and six years of FBARs with a non-willfulness statement, and all penalties — including the information-return ones — waived for those living abroad. This is the structured way to fix multiple years and multiple forms at once.
What makes a penalty worse?
Ignoring IRS notices after receiving them, filing late forms without any explanation attached, and — most of all — continuing to omit a form after learning it was required. Non-willful becomes willful when knowledge is established, and the willful penalties are a different order of magnitude.
Frequently asked questions
I owed no tax, so I never filed. Am I exposed?
To the information-return penalties, yes, if you had reportable accounts, companies, gifts, or funds. The tax penalties are zero; the form penalties are not.
Can I just file the missing forms quietly with my next return?
Late information returns should go in with a reasonable-cause statement or through the Streamlined procedures. Filing them silently invites the automatic assessment with no explanation on record.
Does the IRS really pursue small accounts abroad?
Enforcement focuses on willful cases and large balances, but the automatic assessments on late forms don't distinguish by size.
Is interest waived with the penalty?
No. Interest on tax actually owed continues regardless of penalty relief.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If you've received a penalty notice abroad or suspect you're exposed to one, our U.S. Tax Desk can identify what applies and which relief route fits. See pricing or book a free fit call.
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