- 1 Amending 1040 Tax Return for Overseas Income & Accounts
- 2 Does the US Have a Tax Treaty with the Foreign Country?
- 3 What Categories of Foreign Income Does Taxpayer Have?
- 4 Were Foreign Taxes Paid Overseas?
- 5 Were there Also Accounts and Assets?
- 6 Options for Amending Form 1040
- 7 Offshore Amnesty Program Summary
- 8 Can I Just Start Filing FBAR This Year Instead?
- 9 Our International Tax Lawyers Represent Clients Worldwide
Amending 1040 Tax Return for Overseas Income & Accounts
Amending 1040 Tax Return for Overseas Income & Accounts: When a US Person has foreign accounts, assets, investments and/or income abroad, they are required to report this information to the IRS on their US tax return (1040) — along with various international information reporting forms. Some common reporting forms include: Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865 and Form 8938. When a Taxpayer fails to properly report this information to the IRS, they may become subject to fines and penalties — although oftentimes, the penalties can be avoided, minimized or abated. Lets go through some basics of amending the 1040 to report overseas income, accounts and assets.
Does the US Have a Tax Treaty with the Foreign Country?
When first determining what the potential tax consequences might be for income from a particular foreign country — it is important to determine whether or not there is a tax treaty in place, as this may impact how certain types of categories income may be taxed. For example, is there a double taxation agreement in place that may eliminate tax on certain pension income — or possibly a totalization agreement which may minimize the amount a double tax required for social security contributions.
What Categories of Foreign Income Does Taxpayer Have?
Not all the different categories of income are taxed the same. For example, some income is taxed at the filer’s progressive tax rate — whereas other income is taxed at a reduced rate such as Long-Term Capital Gains (LTCG) and Qualified Dividends. Based on a particular tax treaty, there can be a further reduction of certain taxes.
Were Foreign Taxes Paid Overseas?
When a person has to amend their 1040 tax return based on foreign income, it is important to determine whether that individual has already paid foreign taxes on the foreign income. If the individual has already paid foreign taxes on the income, they they may qualify for a foreign tax credit — which may offset some or all of the US tax liability.
Were there Also Accounts and Assets?
When the Taxpayer has to amend their US tax return, and especially when it involves foreign money — it is important to determine whether or not the Taxpayer also has to report or disclose foreign accounts, assets or investments which were not previously reported on prior returns. If so, the Taxpayer should consider one of the offshore amnesty programs and avoid the quiet disclosure route.
Options for Amending Form 1040
The extent necessary for amending the returns will (typically) hedge on what must be reported in the 1040x.
Income and No Accounts or Assets
When there are no offshore assets or accounts to consider, then there is no international reporting penalties to avoid — and the primary issue will be an under-reporting penalty — which the Taxpayer may be able to get the penalty abated.
Unreported Assets & No Income
When Taxpayer has unreported assets, but no unreported income, then the key goal is for the Taxpayer to avoid offshore penalties by convincing the Internal Revenue Service the since there was no one unreported income — it was merely an administrative issue and should not be subject to penalty. But, with the recent modification of the delinquency procedures in November 2020 — this has become more difficult than in years past.
Unreported Income & Assets
When a taxpayer has both unreported income and assets — typically they will have to consider one of the offshore tax amnesty programs — or a detailed reasonable cause submission — in order safely get into IRS tax compliance.
Offshore Amnesty Program Summary
Offshore Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs, include:
- Voluntary Disclosure Program (VDP or “New” OVDP)
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Delinquency Procedures
- Reasonable Cause
Can I Just Start Filing FBAR This Year Instead?
No, unless the current year is the first-year you had an FBAR Reporting requirement. If you had a prior year reporting requirement, but only begin to start filing in the current year (Filing Forward) it is illegal. In the world of offshore disclosure, this is referred to as an FBAR Quiet Disclosure. The IRS has warned taxpayers that if they get caught in a FBAR Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.
Our International Tax Lawyers Represent Clients Worldwide
Our FBAR Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.