File A U.S. Tax Return When Not Required? A Very Smart Move

Many taxpayers, especially retirees living abroad, may find themselves in a situation in which their income is too low to meet the threshold for filing a U.S. tax return. Retirees who only receive Social Security income (or small amounts of other income in addition), for example, often fall below the tax filing requirement. Understandably, many simply skip filing a return.

Here are 4 important reasons why filing a tax return, even when not strictly necessary, is still a wise decision.

1. Start The Statute Of Limitations

One of the most compelling reasons to file a tax return even if you are not required to, is to start the statute of limitations on the entire tax return. The statute of limitations is the period during which the IRS can audit or challenge your tax return. Generally, the statute of limitations for the IRS to assess additional tax is three years from the date the return is filed. However, if you do not file a return, the statute of limitations never begins, leaving you indefinitely exposed to the possibility of an IRS audit.

For individuals with straightforward tax situations, such as retirees whose income consists solely of Social Security, the chances of an audit might seem remote. However, filing a return closes the door on any potential inquiries after the three-year period, providing peace of mind and financial security.

2. Protect Against Identity Theft

Identity theft is an enormously growing concern. Social Security numbers are precious items for identity thieves. A common scam involves filing a fraudulent tax return using someone else’s SSN to claim a refund. If you are not filing a tax return, you might not realize that a fraudulent return has been submitted in your name until it’s too late. A massive Social Security numbers breach recently occurred involving millions, perhaps billions, of SSNs and other private information.

By filing a tax return, even when you do not need to, you create a record with the IRS. If a second return using your Social Security number is filed, the IRS will flag the attempt and notify you. It is very important to make sure the IRS has a current address so it can reach you – this is easy to do.

Filing a tax return serves as an early warning system. It can prevent identity theft before it escalates into a more complex and costly problem, including denial or revocation of the U.S. passport that arises based on delinquent taxes due to identity theft. Americans abroad who have been victims of identity theft resulting in such passport issues are particularly vulnerable. Resolving these issues often requires direct coordination with U.S. government agencies, financial institutions, and credit bureaus, all of which may be difficult to access from overseas. The physical distance, time zone differences, and potential lack of immediate access to resources, like a U.S. address or phone number, make it much harder for expatriates to swiftly address the problem.

For Americans living abroad freezing credit with credit bureau companies can be particularly challenging. These services often require U.S.-based identification, such as a Social Security number, and the verification process may involve U.S. phone numbers or addresses. Additionally, accessing online systems from abroad can trigger security concerns or restrictions, and mailing documents to verify identity can be time-consuming and less reliable from overseas. The lack of seamless, international customer service further complicates the process, making it difficult for expatriates to protect their credit effectively. Filing a tax return creates a clear record of your financial status and can help prevent fraud from going unnoticed.

3. Claim Potential Tax Credits Or Refunds

Even if your income is below the threshold for filing, you may still be entitled to certain tax credits or refunds. For example, if you had any federal income tax withheld during the year, the only way to get that money back is to file a return. Similarly, if you are eligible for the Earned Income Tax Credit or other refundable credits, you must file to claim them.

For U.S. citizens abroad, tax treaties and foreign tax credits may also play a role in reducing or eliminating any U.S. tax liability. Foreign tax credits can be carried over to future tax years when they may be needed to reduce U.S. tax liability. However, to benefit from these provisions, a tax return must be filed. Neglecting to file could mean losing out.

4. Keep Social Security Benefits In Check

Filing a tax return provides a clear record of your income, which can be crucial when it comes to your Social Security benefits. For retirees, especially those receiving Social Security income, filing a return helps ensure that the IRS and the Social Security Administration are aligned on your income figures. This is especially important if your situation changes, such as if you begin receiving additional income from investments, part-time work, or other sources. Having a clear history of filed tax returns can help avoid any discrepancies that could affect your benefits down the line.

Conclusion

Filing a tax return when not required may seem like an unnecessary step, but it offers several key benefits that can protect you, especially if you live abroad. By filing a return, you limit your exposure to potential audits, protect yourself from identity theft, preserve your claim to potential refunds or credits, and safeguard your Social Security benefits.

For those with simple tax situations, the effort of filing annually is minimal, and the benefits far outweigh the risks of not filing. In the ever-evolving landscape of tax law, it is always better to be proactive rather than reactive. Filing your tax return, even when not required, is a small but significant step.

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