Many United States (“US”) citizens living around the world may not be aware of the US tax reporting requirements that every US citizen, regardless of where they live in the world, has an obligation to file a federal US income tax return declaring their worldwide income (apart from a few exceptions).

The United States income tax requirements are different to other countries, such as Canada, which require residents to file income tax returns only if they are resident in that country.  The US requires every citizen who earns over an exemption amount (currently around USD$10,000) to file a Form 1040 every year, reporting their total worldwide income to the Internal Revenue Service (the “IRS”).  If you are a US citizen living outside of the United States, this will likely mean that you will need to file two income tax returns, one in the United States and one in the country you are resident in.

For the last couple of years the IRS has been cracking down on US citizens living abroad and allowing several amnesty reporting periods for people to bring themselves into compliance with the United States tax reporting requirements.

Although the amnesty periods have now passed, it is up to the discretion of the IRS to decide if penalties will be imposed for failure to file federal income tax returns or to pay tax.  Individuals making late filings or tax payments must show that their failure to file was due to “reasonable cause and not wilful neglect”. Reasonable cause can be considered based on the circumstances of each case.  An IRS official will look at the individual’s education, if they have previously been subject to the tax, if they have been penalized before, if there have been any changes in the tax forms or law that they could not be reasonably expected to know and the level of complexity of a tax or compliance issue.

It is important for US citizens to note that there is an earned income exclusion which exempts a certain amount of income from taxation in the United States.  In 2011 the amount of foreign income excluded from taxation may be up to USD $92,900.00 if certain conditions are met.

Any United States citizens who are living out of the United States and who have not attended to filing income tax returns in the United States in prior years, should consult a cross-border tax specialist and attend to those filings as soon as possible. The 2011 federal tax return is due on April 31, 2012 and a two month extension may be possible if you are living outside of the United States.

More information can be found at the IRS website here.