Be Careful Double-Dipping the Foreign Tax Credit — Offshore Disclosure Tax Returns
- 0.1 But I already Paid Tax Overseas
- 0.2 But What if you were Refunded the Foreign Tax Paid
- 0.3 Donald Cannot Claim a Full Foreign Tax Credit
- 0.4 Want to Learn More about Offshore Disclosure?
- 0.5 Who Has to Report?
- 1 The Basics
For millions of U.S. account holders of foreign accounts, they are coming to the realization that the United States has made the enforcement of unreported foreign accounts, assets, and income a top priority.
Moreover, acronyms such as FBAR and FATCA might causing you unnecessary fear and stress.
The fear and stress is coupled by the online scare mongering – courtesy of attorneys, CPAs and Accountants who spend their time trying to scare unsuspecting individuals into paying extremely large amounts of money for protection they do not need, by incorrectly telling them that they will go to jail unless they follow the tax representative’s advice.
But I already Paid Tax Overseas
This is a very important aspect the offshore disclosure. If you already paid tax overseas, then you generally receive a foreign tax credit against any taxes that may be due in the United States on the same earnings.Nevertheless, the mere fact that you paid tax overseas does not exclude you from having to report that information on your U.S. tax return – and then claiming foreign tax credit and-as opposed to not reporting the money at all.
Here is an Example: Angela is originally from Portugal and has numerous foreign accounts in various Portuguese Banks. Under Portuguese law, the banks withhold a certain amount of tax money each time earnings are generated on the accounts, and that money is deposited directly with the Portuguese tax authorities.
Just because the foreign bank already deposited the money into that Portuguese tax (and thus, foreign taxes have already been paid) does not mean that Angela is exempt from report. Rather, Angela is required to report the earnings on her U.S. tax return as well, and claim a foreign tax credit for the taxes she already paid. With Portugal, a majority of taxes are withheld at 28%, so more likely than not Angela would not have any tax liability in the United States.
But What if you were Refunded the Foreign Tax Paid
It is not uncommon for individuals with foreign accounts who do not reside in the foreign country to receive a foreign refund for taxes they already paid.
Here is a typical example: Donald is originally from India and has foreign accounts in India that generate annual interest income. Some of the accounts are resident accounts – even though Donald now lives in the United States. Even though the bank withholds certain monies – which are then deposited for taxes – when is all said and done at the end of the year, it turns out Donald earns less than the minimum threshold required to have to file a tax return in India. As such, the Indian government refunds Donald the taxes that were withheld.
Donald Cannot Claim a Full Foreign Tax Credit
Since Donald received a refund of the money that was paid overseas he cannot claim a foreign tax credit for those earnings (although he may have an additional credit “carry-over” from prior years or other tax credits from payments in other countries that had not been refunded).
Why? Because of Donald received a refund of the foreign taxes paid, then technically he did not pay any foreign tax on those earnings. As such, when Donald submits to offshore disclosure he may have to pay U.S. tax on those foreign earnings.
Want to Learn More about Offshore Disclosure?
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
Please do not worry. We can assist you as we have assisted hundreds of clients in over 40 countries disclose upwards of $40 million in a single disclosure.
We are available seven days a week and provide flat-fee and full-service representation to our clients around the world.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
All calls are strictly confidential and the information is covered under the attorney-client privilege (even if you decide not to retain our firm).
Call now; let us help you.