The Most Common U.S. Tax Mistakes Expats Make
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Common expat tax mistakes are the recurring errors on U.S. returns filed by Americans abroad — mostly about forms, elections, and assumptions carried over from life in the United States rather than about tax owed. They repeat because the rules behind them stay invisible until something goes wrong. Here are the twelve seen most often, each with its fix.
On this page
- 1. Assuming no U.S. return is due
- 2. Missing the FBAR
- 3. Claiming the exclusion without qualifying
- 4. Choosing the exclusion when the credit was better
- 5. Excluding income that isn't earned income
- 6. Forgetting self-employment tax
- 7. Holding foreign mutual funds
- 8. Treating a foreign pension like a 401(k)
- 9. Never breaking state residency
- 10. Owning a foreign company without Form 5471
- 11. Reporting in local currency, or at one rate
- 12. Ignoring an IRS notice because it arrived late
- Frequently asked questions
- Next step
1. Assuming no U.S. return is due
Paying tax where you live doesn't end U.S. filing; citizenship does not switch off. Fix: file every year above the threshold; use the Streamlined procedures to catch up.
2. Missing the FBAR
The most consequential omission, because the penalty doesn't depend on tax owed and almost every expat's accounts exceed the $10,000 combined threshold. Fix: list every foreign account, including pensions and joint accounts with a non-U.S. spouse, and file electronically by October 15.
3. Claiming the exclusion without qualifying
Taking the foreign earned income exclusion before 330 days are complete, or while keeping a U.S. tax home. Fix: confirm the test, use Form 2350 in the move year, and keep a day log.
4. Choosing the exclusion when the credit was better
In high-tax countries the foreign tax credit often eliminates U.S. tax entirely, leaves carryovers, and preserves IRA eligibility and the refundable child tax credit — all of which the exclusion forfeits. Fix: model both before the first-year election; revoking later locks you out for five years.
5. Excluding income that isn't earned income
Pensions, rental income, dividends, and capital gains can't be excluded. Fix: the exclusion is for wages and self-employment profit only; everything else needs the credit.
6. Forgetting self-employment tax
The exclusion removes income tax, not the self-employment tax on a freelancer's profit. Fix: check whether a totalization agreement covers you; if not, budget for the full amount.
7. Holding foreign mutual funds
Local funds are passive foreign investment companies, taxed punitively with annual Form 8621. Fix: invest through U.S.-domiciled funds at a broker that serves expats; get existing holdings analyzed before selling.
8. Treating a foreign pension like a 401(k)
Without treaty protection, contributions and growth may be currently taxable and the account reportable on several forms. Fix: identify the plan type and the treaty article before assuming deferral.
9. Never breaking state residency
Leaving a sticky state without cutting ties leaves you a resident on paper, taxable on worldwide income. Fix: document the departure — home, license, registrations, accounts — and file the part-year return.
10. Owning a foreign company without Form 5471
A one-person local company is a controlled foreign corporation with annual reporting and possible current taxation. Fix: file the form every year, or consider a disregarded-entity election.
11. Reporting in local currency, or at one rate
Every figure must be in dollars, with the right type of rate for each item and the Treasury year-end rate for the FBAR. Fix: document the rate and source for each conversion; keep acquisition-date rates for assets.
12. Ignoring an IRS notice because it arrived late
International mail doesn't extend IRS deadlines. Fix: respond in writing immediately, ask for more time if needed, and update your foreign address with the IRS.
Frequently asked questions
Which mistake is the most expensive?
Missing information returns — FBAR, Form 5471, Form 3520 — because the penalties are fixed and large regardless of tax owed.
Which is the most common?
Not filing at all, usually because the person paid tax locally and assumed that was the end of it.
I've made several of these. Where do I start?
With the years: if returns or FBARs are missing, the Streamlined procedures fix the past with penalties waived. Then correct the current-year choices.
Can tax software catch these?
It handles the arithmetic once you know which forms apply. It won't tell you that your pension is reportable or your fund is a PFIC.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If any of these sound familiar, our U.S. Tax Desk can review what's been filed, what hasn't, and the quickest clean route forward. See pricing or book a free fit call.
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