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American Expats and the IRS

U.S. citizens living in Germany have to file an annual return, even if no taxes are owed

The most essential thing for an American residing in Germany (or any other foreign country) to know is that he or she is required by law to file a U.S. tax return every year with the Internal Revenue Service if income is above the filing requirement. It doesn't matter if all income was earned in Germany, or if a German return was filed and German taxes paid. He or she still must file a U.S. Form 1040 (or variation of it) and normally other forms as well.

Since there have been so many tax issues involving American expatriates residing in Germany, the Internal Revenue Service (IRS) has established an office in the U.S. Consulate in Frankfurt. It accepts tax returns, tax payments, W-7 applications and taxpayer correspondence. Its address: U.S. Consulate General Frankfurt, Internal Revenue Service, Giessener Str. 30, 60435 Frankfurt/Main. Telephone: 069-7535-3834. They can be sent emails at: irs.frankfurt@irs.gov.

Unless individuals are highly paid, they may not have a U.S. tax liability. Most individuals are able to qualify for the foreign earned income exclusion, which allows them to reduce their taxable income by up to $91,400 for 2009 relating to compensation earned outside of the U.S. The exchange rate for the year 2009 used by the IRS to calculate income is $1.00 = Euro 0.719.

In order to claim the exclusion, an individual must fulfil the requirements of either the Substantial Presence Test (330 foreign presence days within a 12-month period) or the Bona Fide Residence Test (resident of a foreign country for a full calendar year). Once the requirements are fulfilled, the exclusion can be claimed by completing and attaching a Form 2555 to the Form 1040.

For those highly paid individuals who cannot fully exclude their foreign compensation from U.S. taxation with the foreign earned income exclusion, a foreign tax credit can be claimed by completing and attaching a Form 1116 to the Form 1040. The foreign tax credit provides a credit for German taxes paid on income earned outside of the U.S. that is subject to U.S. taxation. By claiming either or both the foreign earned income exclusion and/or the foreign tax credit, most individuals eliminate any double taxation assessed between the U.S. and Germany.

Other items of income, such as interest, dividends and capital gains, are subject to different sourcing rules depending on the circumstances. For example, interest earned on a U.S. bank account by an American residing in Germany will be taxable in Germany under the U.S./German tax treaty. The income must also be reported on the U.S. return, and a foreign tax credit can then be claimed against the U.S. tax assessed on the income.

Information regarding the taxation of other types of income and the related income tax treaties can be obtained from the IRS website at www.irs.gov. Americans residing overseas on April 15th receive an automatic two-month extension to June 15th for filing their U.S. tax return. When filing the return, the individual should attach a statement indicating that he or she qualified for the extension under Reg. 1.6081-5(A). The extension is only an extension of time for filing, not an extension to the payment of any tax liability. Therefore, if a tax liability is due, interest will be assessed from April 15th.

It sometimes happens that Americans residing outside of the U.S. are unaware of the requirement that they must file a return. The IRS is fairly tolerant in such cases. If these individuals come forward voluntarily, file returns for delinquent tax years and pay the tax owed (if any) along with related interest and penalties, there will be no criminal charges imposed. It is probably best to consult a tax professional with international taxpayer experience to prepare the late filings and correspond with the IRS.

In contrast, if the IRS discovers that a taxpayer is delinquent in filing his or her U.S. tax returns, the individual could be facing fines, property seizure, attachment of wages or even prison. Contrary to common belief, the IRS has developed sophisticated means of catching delinquents in this computer age. For example, every time an American renews a passport, the State Department obtains his or her Social Security number and reports it to the Internal Revenue Service.

U.S. tax forms and lists of tax consultants can be obtained from the Consulates in Frankfurt, Leipzig, Düsseldorf, Munich and Hamburg. (The US Embassy in Germany has a list of tax consultants in certain areas at: http://germany.usembassy.gov/acs/lists.html). Forms can also be found on the IRS website: www.irs.gov.

You may also obtain a copy of IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, which should answer most of your questions. It is available at most Embassy and Consulate offices or can be downloaded from the IRS site.

All U.S. taxpayers residing outside the United States should mail their tax returns to:
Internal Revenue Service Center
Austin, TX 73301-0215

You can if you wish also file your tax return electronically at www.irs.gov.