You Probably Owe Nothing, But Silence Still Costs You

by | Jun 20, 2026 | American Expat Tax Lifecycle | 0 comments

The short version

If you are a US citizen living abroad, here is the fact that should lower your shoulders: you most likely owe zero US income tax. The United States taxes its citizens on worldwide income no matter where they live, but two ordinary tools, the foreign earned income exclusion and the foreign tax credit, wipe out the bill for most people abroad. By one Taxpayer Advocate analysis of IRS data for 2016 through 2021, about 62 percent of individual filers living abroad had no US tax liability at all.

So the fear that you owe a fortune is, for most people, misplaced. The real exposure is different and quieter. It is the obligation to file. The United States runs a set of information returns, the FBAR, Form 8938, Form 3520, and Form 5471, that report your foreign accounts, assets, gifts, and companies. Those forms carry their own penalties for not filing, and those penalties apply even in a year when you owe no tax. The danger is not the tax. The danger is the silence. This article explains why you probably owe nothing, walks the four forms that can bite anyway, and points to the structured way back if you are already behind.

What the law actually says (primary authority first)

Start with why the bill is usually zero. US citizens and resident aliens are taxed on worldwide income regardless of where they live, so the duty to file a Form 1040 follows you across the border. Two provisions then cancel most of the resulting tax.

The first is the foreign earned income exclusion under Internal Revenue Code section 911. It lets a qualifying person abroad exclude a large block of foreign wages and self-employment income from US tax. For tax year 2025 the maximum exclusion is 130,000 dollars per qualifying person. A married couple who both work and qualify can exclude up to 260,000 dollars between them.

The second is the foreign tax credit under Internal Revenue Code sections 901 and 904. It gives you a dollar-for-dollar credit against US tax for income tax you already paid to the country you live in. If you live in a country whose income tax is similar to or higher than the US rate, the credit alone tends to erase the US bill on income the exclusion did not already remove. Between the exclusion and the credit, the typical expat lands at zero. That is the statutory machinery behind the 62 percent figure.

Now the catch. Owing no tax does not switch off your reporting duties. The Code and the Bank Secrecy Act impose a separate set of information returns that exist to disclose what you hold abroad, and each one carries its own penalty regime that does not care whether you owed a cent of tax. The four that catch ordinary people are below.

How it works in practice

These four forms are where quiet, tax-free years still generate exposure. None of them is a tax. Each is a disclosure, and each has a penalty for staying silent.

1. The FBAR (foreign bank account report). If your foreign financial accounts together exceed 10,000 dollars at any point in the year, you must file a Report of Foreign Bank and Financial Accounts, FinCEN Form 114, known as the FBAR. The threshold is an aggregate, so two modest accounts that each sit below 10,000 dollars can still cross the line when added together. The authority is 31 U.S.C. 5314, and the civil penalties live in 31 U.S.C. 5321(a)(5): a non-willful violation carries a penalty of up to 10,000 dollars, and a willful violation carries the greater of 100,000 dollars or 50 percent of the account balance. None of that depends on owing tax. A retiree with a pension account and a checking account abroad, owing nothing, can still be exposed for not filing the form.

2. Form 8938 (statement of specified foreign financial assets). This is the FATCA disclosure under Internal Revenue Code section 6038D, and it is separate from the FBAR even though the two overlap. For taxpayers living abroad the thresholds are higher: an unmarried person files if specified foreign financial assets exceed 200,000 dollars on the last day of the year or 300,000 dollars at any time during the year, and a married couple filing jointly files at 400,000 dollars year-end or 600,000 dollars anytime. The penalty under section 6038D is 10,000 dollars for the failure, plus 10,000 dollars for each 30-day period the failure continues after the IRS sends notice, up to an additional 50,000 dollars. Filing Form 8938 does not excuse the FBAR, and filing the FBAR does not excuse Form 8938.

3. Form 3520 (foreign gifts, inheritances, and trusts). Many expats marry into a foreign family or inherit from one, and that is where this form appears. A US person who receives more than 100,000 dollars during the year in gifts or bequests from a nonresident alien individual or a foreign estate must report it on Part IV of Form 3520. The gift itself is usually not taxable income to the recipient. The penalty for not reporting it is. Under Internal Revenue Code section 6039F, the penalty for an unreported foreign gift is 5 percent of the gift for each month the failure continues, up to 25 percent of the gift. A separate and harsher regime applies to foreign trusts: Internal Revenue Code section 6677 sets the penalty for failing to report a foreign trust at the greater of 10,000 dollars or 35 percent of the gross reportable amount. A tax-free inheritance can still produce a five-figure penalty for the missing form.

4. Form 5471 (interests in foreign corporations). If you started a company in the country you moved to, or hold a large enough stake in a foreign corporation, you may have a Form 5471 filing duty under Internal Revenue Code section 6038. The penalty is 10,000 dollars for each annual accounting period the form is missing, plus 10,000 dollars for each 30-day period the failure continues after notice, up to an additional 50,000 dollars per return. An expat who set up a local consulting company and never connected it to a US filing obligation is the classic case. The corporation can be unprofitable, and the penalty still runs.

The pattern across all four is the same. The tax is usually zero. The form is mandatory. The penalty attaches to the missing form, not to a tax bill. That is why silence, the path that feels safest, is the one that actually costs.

The numbers

Here are the four information returns side by side, with the trigger and the penalty exposure each one carries, drawn from the controlling authority.

Information return Who it catches Filing trigger Penalty for not filing Authority
FBAR (FinCEN Form 114) Anyone with foreign accounts Foreign accounts over 10,000 USD aggregate at any time Non-willful up to 10,000 USD; willful the greater of 100,000 USD or 50% of the balance 31 U.S.C. 5321(a)(5)
Form 8938 Higher-balance asset holders abroad Assets over 200,000 USD year-end / 300,000 USD anytime (single, abroad); 400,000 / 600,000 (MFJ, abroad) 10,000 USD, plus 10,000 USD per 30-day period after notice, max 50,000 USD continuation IRC 6038D(d)
Form 3520 (foreign gift) Recipients of foreign gifts or inheritances Gifts or bequests over 100,000 USD from a foreign individual or estate in a year 5% of the gift per month, up to 25% of the gift IRC 6039F(c)
Form 3520 / 3520-A (foreign trust) Owners and beneficiaries of foreign trusts A reportable foreign trust transaction or ownership Greater of 10,000 USD or 35% of the gross reportable amount IRC 6677(a)
Form 5471 Owners of foreign corporations A reportable interest in a foreign corporation 10,000 USD per accounting period, plus 10,000 USD per 30-day period after notice, max 50,000 USD continuation IRC 6038(b)

Every figure above is a reporting penalty. Not one of them is a tax. A person who owes the IRS nothing can owe these.

What this means for you

A few practical points.

First, separate the two questions in your mind. The question “do I owe US tax” is usually answered no, because the exclusion and the credit do their work. The question “do I have US forms to file” is a different question with a different answer, and it is the one that carries the penalty. Owing nothing and filing nothing are not the same thing.

Second, the thresholds are lower and broader than people expect, and the forms stack. The FBAR threshold is only 10,000 dollars in aggregate, low enough that an ordinary checking-plus-savings setup abroad can trip it. Form 8938 and the FBAR can both apply to the same accounts at the same time, and filing one does not satisfy the other. A foreign gift or inheritance you never thought of as taxable can still demand Form 3520. Walking through which of the four actually apply to your facts is the first useful thing to do.

Third, the exposure compounds with time but it is fixable. Several of these penalties keep running for each period the failure continues, so a missed form does not sit still. The reassuring part is that the IRS maintains structured, low-penalty paths for people who are behind and whose failure to file was an honest mistake rather than a deliberate one. Coming forward through one of those paths, on your own terms, is almost always better than waiting to be found. You do not need to know which path fits before you ask; that is what a review is for.

If you are already behind

If reading the four forms above gave you a sinking feeling because you have not filed some of them, that is common, and there is a designed way back. The IRS built a program for exactly this person: a US citizen abroad who owes little or no tax but is behind on the information returns and never knew the obligation existed. It is called the Streamlined Foreign Offshore Procedures, and for those who qualify it brings you current with no offshore penalty. There is a non-residency test built around being outside the United States for at least 330 full days, and a certification that your failure to file was non-willful, which is to say an honest misunderstanding rather than a choice to hide.

That resolution path is the subject of the companion piece “Years Behind on Filing Abroad: The Streamlined Path Most Expats Don’t Know,” published on my IRS resolution site, Sheepdog Tax Resolution, at sheepdogtaxres.com. If you are already behind, start there. The mechanics, the 330-day test, and the one mistake that can disqualify you are walked out in full. This article is the front door, that one is the way home.

Related reading

Companion pieces in The American Expat Tax Lifecycle:

  • Citizenship-Based Taxation 101: Why Your US Filing Duty Follows You Abroad.
  • The Foreign Mutual Fund Trap: Why Your Overseas Brokerage Account Can Be a Tax Bomb.
  • FBAR or Form 8938, or Both: A One-Table Guide.
  • Years Behind on Filing Abroad: The Streamlined Path Most Expats Don’t Know (on Sheepdog Tax Resolution).

For the underlying authorities, see the inline links above to Internal Revenue Code section 911 (the exclusion), the foreign tax credit, and the four information-return penalty provisions cited in the Sources block.

How Sheepdog Tax can help

I am a CPA and Certified Fraud Examiner, and this is a veteran-owned practice. Most of the worry I hear from Americans abroad is about a tax bill that, once we run the exclusion and the credit, turns out to be zero. The work that actually matters is mapping which of the information returns apply to your facts, so the forms that carry the penalties get filed and nothing is left silently outstanding.

A good first step is a short, no-pressure Expat Compliance Risk Check: a plain review of your accounts, assets, any foreign gifts or companies, and your filing history, to see which of the four forms you have a duty to file and whether anything is overdue. Every situation is different, and I do not promise a particular result. What I offer is an honest reading of where you stand and a clear list of what, if anything, needs to be filed. To start, reach me at noah@sheepdogtax.com.

Sources (primary authority first, then secondary commentary)

  1. IRS, U.S. Citizens and Resident Aliens Abroad (worldwide-income filing duty). https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad
  2. 26 U.S.C. 911, Citizens or residents of the United States living abroad (foreign earned income exclusion). https://www.law.cornell.edu/uscode/text/26/911
  3. IRS, Foreign Earned Income Exclusion. https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
  4. IRS, Figuring the Foreign Earned Income Exclusion (2025 maximum 130,000 USD). https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion
  5. 26 U.S.C. 901, Taxes of foreign countries and of possessions of United States (foreign tax credit). https://www.law.cornell.edu/uscode/text/26/901
  6. IRS, Foreign Tax Credit. https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit
  7. 31 U.S.C. 5314, Records and reports on foreign financial agency transactions (FBAR authority). https://www.law.cornell.edu/uscode/text/31/5314
  8. 31 U.S.C. 5321, Civil penalties (FBAR penalties). https://www.law.cornell.edu/uscode/text/31/5321
  9. FinCEN, Report of Foreign Bank and Financial Accounts (FBAR), 10,000 USD threshold. https://www.fincen.gov/report-foreign-bank-and-financial-accounts
  10. 26 U.S.C. 6038D, Information with respect to foreign financial assets (Form 8938 penalties). https://www.law.cornell.edu/uscode/text/26/6038D
  11. IRS, Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets (living-abroad thresholds). https://www.irs.gov/businesses/corporations/do-i-need-to-file-form-8938-statement-of-specified-foreign-financial-assets
  12. 26 U.S.C. 6039F, Notice of large gifts received from foreign persons (Form 3520 foreign-gift penalty). https://www.law.cornell.edu/uscode/text/26/6039F
  13. IRS, Gifts from Foreign Person (Form 3520 reporting threshold and penalty). https://www.irs.gov/businesses/gifts-from-foreign-person
  14. 26 U.S.C. 6677, Failure to file information with respect to certain foreign trusts. https://www.law.cornell.edu/uscode/text/26/6677
  15. 26 U.S.C. 6038, Information reporting with respect to certain foreign corporations and partnerships (Form 5471 penalties). https://www.law.cornell.edu/uscode/text/26/6038
  16. National Taxpayer Advocate, 2023 Annual Report to Congress, Most Serious Problem No. 9 (compliance challenges for taxpayers abroad). https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2024/01/ARC23_MSP_09_Compliance-Abroad.pdf

Prepared by Noah Green, CPA, CFE.

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