The problems with free tax software for Americans living abroad.
CEO Andrew Landin, EA, shares his experience of being asked to complete his first international US tax returns by hand when he was training with Ernst & Young. Despite numerous accounting and tax qualifications plus top-of-line tax software, the return was still wrong in multiple places.
“The first and major problem with tax software is that it’s designed for people living in America, not for those living abroad, and of course the two things are incredibly different from one another.”
One of the first things tax software asks for is a person’s W-2. You’re straight into a wall right there. Very few Americans abroad have a W-2 let alone get paid in US dollars. When you’re dealing with foreign income, you need to use the right exchange rate set by the IRS, and the IRS asks for different exchange rates for different types of income. If you have any self-employed income, the game changes again.
This is all before the consideration of the tax treaty held between the US and the country you’re living in. Many countries also have a Totalization Agreement too which can really benefit US people living in that country, if you know how to take best advantage of it.
Is having the best software enough for American expats to be assisted throughout the entire tax filing process?
In reality, no. Not even top-of-the-line software is enough for expats to get an accurate US tax return, never mind the free and cheap versions that railroad clients into a particular filing method.
Experts agree that even with the aid of the most sophisticated software, experienced international tax knowledge is critical.
What’s the big problem with preparing your own tax return when living abroad?
The first is simple, you don’t have a professional checking that the information you’re inputting is correct and in the right place.
The second is software programs don’t know if you’ve missed something out. What about miscalculated exchange rates?
The classic mistake we see is misclassified retirement accounts. Non-US pensions (superannuation / KiwiSaver) and retirement funds often require additional forms to be filed. As soon as an individual puts extra money into one of these accounts over and above the specified threshold, the whole game changes.
Additional income is another problematic area. From bank interest to investment and rental income (don’t forget AirBnB too). Maybe a little freelance or consulting income you made on the side… where do these go on your tax return? How much do you include and what if any of that income is shared with someone else?
“A tax return is as good as the user’s international tax knowledge, and their understanding of the tax treaty between the US and the country they live in.”
There are many things we can learn to do ourselves, but we outsource to specialists so it’s done right.
“I could learn to service my own car and save a few hundred bucks, but I’m not going to. Mainly because I want to drive it again with confidence and I’d rather spend the time doing what I’m good at… or something fun!”
Clark Stott – Client Services Director
This situation may be likened to modern commercial aircrafts spending many hours on autopilot. There is incredible software doing an amazing job, but we still want a pilot in the cockpit! Aircraft flight planners need to be configured for each flight. Most of us would like that done by a pilot, not a passenger that’s watched a few YouTube videos.
“I’d been filing my own tax returns for five years. Three months after filing my 2018 tax return, a penalty for $10,000 arrived in the mail. I couldn’t believe it. I thought it must be a mistake. I called the IRS to try and sort it out which was useless. They said the penalty stood and was due for payment immediately. I kept asking them what the penalty was for and they just kept saying “it’s detailed in the letter we sent you”.
It was scary… and I didn’t have $10,000!
A friend recommended Expat Tax Online. They fixed all my previous tax returns and got me out of the penalty and accruing interest.
Lesson learned. Leave it to the experts.”
Maria Spella – ETO Client
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
What negative consequences can result from using free file software?
We’ve reviewed hundreds of tax returns that have been prepared using free/cheap online service. The far majority were in pretty bad shape. Many resulted in tax due, when it wasn’t… and scarily, some generated penalties that didn’t need to be paid!
Unbelievably, almost 80% of clients that were eligible for the Child Tax Credit Refund, had their tax return prepared without the claim, leaving thousands of dollars out of their pocket.
Another common theme with these programs is to force users to take the Foreign Earned Income Exclusion (Form 2555) which can put the majority of US citizens living abroad at a major disadvantage. For U.S. citizens living in Canada, Australia, NZ, the UK, Ireland, and most of the EU countries… this is not a good way to file US tax returns… money is being left on the table year on year.
“The best solution is a hybrid solution… smart software designed for US people living abroad combined with a tax professional that works exclusively with people living outside of the United States.”
“There’s no such thing as a free lunch.”
The old cliché applies here too. The software service appears to be free or incredibly cheap. In reality, someone else is paying for the service for you. Data companies that trade personal information will be happy to pay the tax firm to prepare your tax return in exchange for your personal information that they can sell to their marketing companies. Check the fine print hidden in their terms and conditions.
These free file software programs are great for people living in the US with a W-2 or 1099. They’re just not designed for those living abroad.
The other problem is, they take no responsibility if you get an IRS notice or audit. You’re on your own.
It’s a profession. Can you keep up?
Tax laws change frequently and the IRS doesn’t advertize. U.S. tax law can change multiple times per year. Each time a new Act is signed into law, there are usually tax ramifications, let alone when a new president takes office. The IRS will publish the new tax laws on their website and that’s the end of it. Anyone who thinks the IRS will let them off because they “didn’t know” hasn’t faced an IRS audit. If you’re not using a professional, it’s your responsibility to prepare your tax return accurately or face the consequences.
Why should I choose Expat Tax Online over free file software?
- You want an accurate tax return that factors in your present and future.
- You want maximized deductions, exclusions, and credits.
- You want to take advantage of the tax treaty between the United States and the country you live in.
- Peace of mind that your tax return is prepared by an IRS-licensed tax professional specializing in international US taxation.
- Complete support should you any IRS notices.
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