Yes. And this is a very common misconception for individuals who are considered dual citizens.
Let’s take David, a dual citizen in both China and in the United States.
David has numerous accounts in China and Hong Kong. As such, David reports his foreign income from China and Hong Kong in their respective countries — but he does not report the income to the United States.
Likewise, David earns a six-figure income in the United States and reports the income (and pays tax) in the United States on these earnings, but does not report them abroad.
David is Out of U.S. Tax Compliance
The United States is one of the few countries in the world that uses a CBT tax system. What does that mean? It means that the United States taxes individuals on their worldwide income (Citizen Based Taxation). It does not matter that the income is earned abroad; David is a U.S. citizen (even if he is a dual citizen), and therefore he must report the income annually on his US tax return.
But the Earnings are Tax-Free in China and Hong Kong?
While this is true, the United States does not care. From the United States’ perspective, David is a US citizen who is earning income abroad. As such, David is required to report his worldwide income in the United States.
What is Worldwide Income?
The United States is one of only a handful of countries on the planet the taxes individuals on their worldwide income. What does that mean? It means that whether or not you reside in the United States or in a foreign country, you are required to report all of your US income as well as foreign source income on your US tax.
It also does not matter if the income you earn is tax exempt in a foreign country, or whether the income you earn in a foreign country was already taxed (see below). While you may be able to obtain a credit or exemption for the taxes you paid or income you earned in a foreign country – you are still required to report the income on your US tax return.
Foreign Tax Credit is Inapplicable
In David’s situation, because the interest income is not taxed abroad, David does not get the benefit of the Foreign Tax Cedit. Nevertheless, David is required to report the information on his US tax return and pay tax — unless otherwise exempted.
Will my Foreign Bank Report to the IRS?
The way many individuals are getting the trouble is that their Foreign Financial Institution has become aware that under FATCA (Foreign Account Tax Compliance Act) the institution must report any U.S. account holder to the United States, and even individuals who are in the United States on a work visa are considered U.S. persons.
As such, the chances of getting in trouble in the United States for not properly filing or reporting foreign income has increased significantly over the last few years.
What if I did Not Report it in Prior Years?
If you have not reported foreign income in prior years, your best option may be entering IRS offshore voluntary disclosure. The following is a summary of the different IRS offshore voluntary disclosure programs and options:
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel
Generally, experienced attorneys in this field will have all the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.