‘Failing to file your US tax return can be costly’

Navigating the multiple layers of bureaucracy can be a huge challenge for Americans living in Italy, particularly when it comes to the tax system. The Local speaks to lawyer Timothy W Scott to find out how US citizens can avoid getting caught out.

'Failing to file your US tax return can be costly'
Us citizens working in Italy still need to file taxes back home. Photo: 401(K) 2012/Flickr

If a US citizens works in Italy, do they still need to file taxes back home?

Yes. An an American citizen you’re taxed on your worldwide income regardless of where you live in the world. This means US citizens working in Italy pay Italian taxes, but must not forget they still need to declare their earnings back home.

What does the process involve?

The key thing is to file a tax return in Italy, then file in the US. The two countries have an agreement which means the IRS tax authority in the US will make sure citizens are not being double taxed.

Whether it’s wages, dividends or other forms of income, one country will offer the other certain credits. In most cases Italian taxes are higher than US taxes, so you don’t have to pay anything in the US.

What happens for people earning money in both Italy and the US?

US citizens earning money in both countries are typically tax residents in Italy, meaning their income is declared in Italy but they still need to file taxes back home afterwards.

What if you're self-employed?

The US has income tax and self-employment tax. You could have no US income tax liability but could still have around 15 percent of self-employment tax to pay. This catches a lot of people out.

If US citizens work for a tax-free international organization, do they still have to file taxes in the US?

Whereas UN staff are exempt from income tax in Italy, the same cannot be said for the organization's staff in the US and so employees in Italy still have a US tax liability.

But the UN and international organizations provide a tax equalization policy, so if an American is working for FAO (Food and Agriculture Organization) the organization will reimburse them for the US tax paid.

But it's worth noting that while an international organization will reimburse US citizens for the tax, they won’t pay for any penalties if their employees file taxes too late.

When does this all have to be done?

Tax for the previous calendar year needs to be paid by April 15th. However, expats have a three-month extension to get all the paperwork together which is due by June 15th.

What happens for people who don't file their taxes in the US?

The consequences can be costly. For people who fail to file their taxes correctly in the US, they face a penalty of up to 25 percent of the sum plus interest.

What's the best way to stick to the rules?

Find out what your liabilities are, don’t assume you don’t have to file. It’s a very unwelcome surprise to go back to the US and find out you’re not compliant.

The biggest thing is to ask questions. The easiest thing to do is call someone and ask them to talk you through the process.

Visit Timothy W Scott's website.

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EXPLAINED: What is Italy’s new digital invoicing rule for freelancers?

Italy is bringing in new rules from July that mean changes for freelancers on the 'flat tax' rate. Here’s what you need to know about the new ‘fatturazione elettronica’, or digital invoicing system.

EXPLAINED: What is Italy’s new digital invoicing rule for freelancers?

Italy has been slowly moving more of its bureaucratic systems online in recent years, and in many cases this has made it quicker and easier for residents to access services and get their considerable amounts of Italian life admin in order.

It was hoped that the new electronic invoicing rule would do the same for freelancers on Italy’s flat-tax regime, by doing away with the existing need to print out invoices and affix tax stamps by hand.

READ ALSO: Beat the queues: 19 bits of Italian bureaucracy you can do online

But a close look at the details of the new rules shows that it probably won’t make life easier for those on the flat tax rate, who have so far been spared the bulk of that infamous Italian red tape – but now need to get to grips with a new online system.

Known as the ‘regime forfettario‘, Italy’s flat-rate tax scheme for individuals and small businesses was introduced in 2015 to encourage more commercial activity by slashing tax rates and simplifying bureaucracy.

New freelancers who choose this tax system generally pay somewhere between just five and 15 percent tax on earnings, regardless of overheads.

READ ALSO: The pros and cons of Italy’s five percent flat tax for freelancers

Little has changed since its inception seven years ago, but freelancers using the scheme now need to be aware of new rules coming into force from July 1st, 2022.

How you invoice – how you send, receive and store receipts, therefore – is due to move from analogue to digital, bringing new requirements and know-how on digital invoicing software.

Here’s what’s changing for freelancers with the so-called ‘fattura elettronica‘.

Who is required to send electronic invoices?

While this was already a requirement for the self-employed on other tax regimes, those on the flat tax rate will now be included from July 1st.

They were previously exempt, but that changed under the PNRR (National recovery and resilience plan or piano nazionale di ripresa e resilienza) – the Italian government’s plan for using EU funding for post-pandemic economic recovery.

Digital invoicing is intended to fight Italy’s major problem with tax evasion, as well as to further automate accounting processes.

For now, not all freelancers under this tax scheme need to move to digital accounting – only those who received an income in excess of €25,000 in the previous year are required to comply with the new rule.

It will then extend to all freelancers using the flat-rate scheme from January 1st, 2024.

From that date, everyone subscribed to the ‘regime forfettario’ will have to switch to electronic invoicing and there are hefty penalties in place for those who don’t.

How will electronic invoices work?

Italy’s tax authority has defined a couple of notable differences between the digital or electronic invoice (fattura elettronica) and a paper invoice (fattura di carta) in its updated guidelines.

Firstly, the digital invoice has to be created using a digital device (a computer, tablet or smartphone), and secondly it has to be sent to the client via an ‘Interchange System’, the so-called Sistema di Interscambio (SdI).

READ ALSO: ‘Smart working’? Here’s what you need to know about going self-employed in Italy

Italy’s flat-rate tax scheme is going digital. Photo by Christian Dubovan on Unsplash

This electronic postal system checks whether the invoice contains the required data for tax purposes, as well as checking the verified e-address (or the so-called PEC address) of the recipient.

In doing so, the electronic invoice automatically checks that the VAT number (partita IVA), or the tax code (codice fiscale) depending on who you send the invoice to, really exist.

Once the checks are completed, the system sends the invoice to the client, which will trigger an alert to the freelancer with a delivery receipt, showing the date and time the document was delivered.

How can you send an e-invoice?

There are a few accounting software options on the market if you’re now faced with having to send electronic invoices.

Some charge a fee of around €1-€4 per month or come at a cost per transaction.

Platforms such as ‘Aruba‘ or ‘Fatture in Cloud‘, are competitive and may offer you a free trial before you deciding to buy.

The Italian revenue agency (Agenzie delle Entrate) has also created free-of-charge services to help send and receive e-invoices. These include websites as well as apps for completing the required steps, which are detailed in their guide here.

You can access their Invoices and Receipts (‘Fatture e Corrispettivi‘) portal to benefit from these free services.

You’ll either need a Spid ID (‘Sistema Pubblico dell’Identità Digitale‘), a Carta Nazionale dei Servizi (CNS) or accounting credentials known as Fisconline/Entrate, which are issued by the Agenzie delle Entrate.

You can also delegate this task to an intermediary, such as an accountant (commercialista) who would do this on your behalf, the revenue agency stipulates 

What about the Italian tax stamp?

Until now, freelancers issuing invoices under the ‘regime forfettario‘ have had to attach a €2 stamp, called a ‘marca da bollo’, to every invoice over the value of €77,47.

So what happens when e-receipts go digital and you can’t physically stick a stamp on a document? Well, that goes digital too and the Inland Revenue has issued a 16-page guide on how you need to go about it.

It seems the previously attractive ‘light’ accounting of this regime is about to get bogged down by time-consuming bureaucracy too.

Authorities will systematically check that the fee has been paid each quarter for all the invoices that require it.

As a general rule, you can see if there are any discrepancies by the 15th day of the first month following each quarter on their Invoices and Receipts portal.

You or your intermediary have until the end of that month to fix any accounting errors, but make sure to check with an accountant if you have any difficulties or need specific advice for your personal circumstances.

Once you receive your final stamp duty bill for each quarter, you can pay either via IBAN, which you set up on the portal, or by filling out an electronic F24 form – details of how to do that are included in the guide.

For further information and FAQ’s, see Italy’s Inland Revenue Agency website on the electronic invoice here.

Please note The Local cannot advise on personal cases and seeking expert financial advice is recommended.