Expat Tax Questions & Answers – IRS International Reporting Guide
- 0.1 Golding & Golding, APLC
- 0.2 Do I have to Include Offshore Tax-Free Income?
- 0.3 Do I report ownership In a Foreign Company?
- 0.4 Can the IRS Take My Passport?
- 0.5 When/How do I File an FBAR?
- 0.6 When/How do I File FATCA?
- 0.7 Does the U.S. Tax My Provident Fund?
- 0.8 Does the U.S. Tax My Superannuation Fund?
- 0.9 Superannuation and U.S. Tax Treaty Language
- 0.10 What is Form 8854?
- 0.11 How do I Get Into Compliance?
- 1 IRS Voluntary Disclosure of Offshore Accounts
- 1.1 When Do I Need to Use Voluntary Disclosure?
- 1.2 Golding & Golding – Offshore Disclosure
- 1.3 The Devil is in the Details…
- 1.4 What if You Never Report the Money?
- 1.5 Getting into Compliance
- 1.6 1. OVDP
- 1.7 2. Streamlined Domestic Offshore Disclosure
- 1.8 3. Streamlined Foreign Offshore Disclosure
We are providing you with “Expat Tax Questions & Answers – IRS International Reporting Guide,” prepared by the International Tax Lawyers at Golding & Golding.
As a U.S. Expat, there are very important tax laws that you must be aware of in order to ensure you remain in compliance with IRS filing and reporting requirements.
To the surprise of many Expats, they may have U.S. reporting and tax requirements that they never could have imagined — especially considering they no longer reside within the United States.
The biggest area of concern for expats and taxes are the penalties a U.S. Expat may be subject to it he or she fails to properly file and submit the necessary U.S. Tax Forms with the Internal Revenue Service, Department of Treasury, or other Government Agency — depending on the facts and circumstances of their situation.
Golding & Golding, APLC
We represent hundreds of new international clients each year – and speak with several thousands of clients in over 50 countries. Many of these individuals are Expats who have the same questions, fears, and concerns regarding the current state of the law, and how Citizen-Based Taxation impacts their ability to comfortably build and thrive outside of the US borders.
These 10 questions are not necessarily the most important questions, but they are the questions we receive most often from our Expat clients.
*When it comes to getting into compliance, our tax law firm focuses exclusively on IRS Offshore Disclosure. We do not provide tax planning services or assist you in preparing for compliance; we are the law firm (one of the only law firms worldwide exclusively practicing in this niche) you call once you realize you are already out of compliance, and facing some serious penalties.
By understanding the 10 following topics, it may better prepare you to avoid any future fine or penalty for noncompliance – but we always recommend that you speak with an experienced international tax planning firm before making any cross-border relocation.
Am I Still Subject to U.S. Tax?
Yes, because United States practices Citizen-Based Taxation. That means, that no matter where in the world you reside, you are still subject to US tax (unless you are a non-U.S. person without certain types of U.S. Sourced Income). To clarify, individuals who are subject to US tax include: U.S. Citizens, Legal Permanent Residents, certain temporary Visa Holders who pass the Substantial Presence Test (H-1B, L-1, E-2), and Long-Term Residents who did not properly file a form 8854 and renounce or relinquish their citizenship/residency.
There are many myths and folklore involving U.S. Tax Law and Expat Rules, such as once you live outside of the United States for 25 years, you are no longer subject to US tax – but that is not true. If you fall into one of the aforementioned categories of individuals, then you need to file a US tax return each year and report your worldwide Income.
Even though you must report this income, depending on the type and category of foreign income you are earning, you may qualify for the Foreign Earned Income Exclusion or the Foreign Tax Credit. In some circumstances, you can combine them both to reduce taxes — such as highly compensated earners (not just employees).
Do I have to Include Offshore Tax-Free Income?
Yes. But, it should be noted that the United States has entered into tax treaties with many different countries. Therefore, even though the money is “taxable,” you may still receive an exclusion for the income.
The U.S. Taxes everything. For example, if you live in Hong Kong and earn bank interest income, then you have to report the income. If you live in India and your PPF is earning (but not distributing) interest, capital gains, or dividends, that must be included as well.
Likewise, if you have a savings account in Ireland that is tax-free by the government, or you are earning rental income in South Africa that is below the threshold requirement for having to report it in South Africa, it does not mean it will be excluded from your U.S. Tax Return.
In other words, all foreign income is potentially taxable. The idea of CBT (Citizen Based Taxation) and Worldwide Income Tax go hand-in-hand, and means that the U.S. taxes individuals on income they earn anywhere in the world (aka Worldwide Income). As a result, just because you are temporarily or permanently residing abroad, does not mean you should stop reporting worldwide income. This is especially true if you recently moved abroad and believe you will never return to the United States.
Trust us, we have represented enough people who let us know they moved abroad in their younger years (thinking they would never relocate back to the United States) only to settle down, get married and realize there are many benefits to raising children in the United States – and want to come “home.”
Do I report ownership In a Foreign Company?
Usually, and this is where stars get a little more complicated, but we’re going to keep it basic and simple. If you are a U.S. Expat residing overseas and you have ownership interest in a foreign company, the threshold requirement to determine is whether you have ownership in a Foreign Corporation or a Controlled Foreign Corporation.
The test is relatively simple: if the foreign corporation is owned more than 50% by U.S. persons who each own (attribution rules apply) at least 10% interest in the Corporation, then it is a controlled foreign corporation and you will be subject to US tax and reporting rules that are much stricter than normal for certain types of income.
Primarily, the rules such as Subpart F income involve passive income — with the goal of the U.S. government is to disallow controlled foreign corporations from accumulating significant wealth abroad, only to distribute it later as passive income (or issue “loans” to the owners), and avoid annual tax and reporting requirements.
Alternatively, if you happen to have ownership in a foreign corporation that is owned primarily by foreigners, then it is not a controlled foreign corporation and the same rules do not apply. Nevertheless, if you own at least 10% ownership (or have control thereof or other potential threshold requirements) then you must also file a form 5471 (you would file the form 5471 if you have at least 10% ownership in either a foreign corporation or controlled foreign corporation).
The failure to file the form can have significant consequences, including penalties that start up words of $10,000 per occurrence. Moreover, recently the IRS issued what may be considered excessive fines against an individual who attempted to sidestep this reporting requirement, and in the District Court upheld the ruling (presumably it will be appealed, but the current state of the law is that penalties will sand). The case is called, Flume.
Can the IRS Take My Passport?
Yes. Moreover, in recent months (currently, June 2017) the IRS has been increasing public awareness that this is a very real law, and it is going to be enforced. Technically, a person must have more than $50,000 worth of tax debt before the IRS can deny or revoke a US passport.
The reality is, having a passport revoked or denied is a very real concern for individuals who travel extensively and/or ex-pats who reside abroad but like to come back and visit. It could mean that you are detained at the airport, and/or it could be part of a larger investigation.
The IRS is understaffed. Therefore, once you get stuck in the matrix of IRS dealings, it can be very arduous trying to find a sympathetic ear at the IRS to approve the return of your passport. In addition, the current president is not very forgiving on issues involving immigration, so it is safe to say ensuring that your passport is returned to you is not going to be a primary concern or objective of the current administration.
When/How do I File an FBAR?
An FBAR is a Report of Foreign Bank and Financial Account Form. It is required to be filed by any individual when that individual has ownership, joint ownership, signature authority, or other relation to money in foreign accounts or otherwise, that when aggregated together on any day the year exceeds $10,000 (Read: that you have access to, o are the owner or signatory to accounts that exceed, in total $10,000 — you have to report on an FBAR).
Filing the FBAR has no relation to income. In other words, even if you have no income reporting requirement, you still have a requirement to file an annual FBAR Statement. The biggest issue with the FBAR is the penalty. The penalty is absurd, and ranges anywhere from a warning letter in lieu of penalty all the way up to $10,000 per account, per year-presuming you are non-willful. If your willful, the IRS can take upwards of $100,000 or 50% value of the account-whichever is greater.
As you can see, Internal Revenue Service and U.S. government takes these matters very seriously. Moreover, with the introduction of FATCA (see below), the IRS has ramped up enforcement priority of offshore and foreign accounts in particular, and included in the enforcement priority is the enforcement of the FBAR Penalty
When/How do I File FATCA?
FATCA is the Foreign Account Tax Compliance Act. It is a complex law, that has various facets to it, but most important (to you) is the reporting requirement. Whether or not you meet the threshold reporting requirement to have to file for FATCA will depend on the specific facts and circumstances of your situation. To put it in perspective, if you are married filing joint and residing overseas the threshold requirement is very high, and if you are single and filing as a US resident, the threshold is very low for having to report.
While many individuals are up in arms about FATCA – it is currently the law, and at the current time there are no signs that the government is planning on repealing or modifying the law. Therefore, when it is time to file your tax return if you meet the threshold requirements then you must file a form 8938 along with your tax return. Unlike the FBAR, the form 8938 is filed along with your tax return and submitted directly to the Internal Revenue Service
Does the U.S. Tax My Provident Fund?
Even though the Provident Fund may receive tax-deferred treatment in its country of origin, does not mean the United States recognizes that tax-deferred treatment as well.
Example: David is a Permanent Resident of Singapore and therefore is required to contribute to his CPF. The Singapore CPF is one of the largest Provident Funds in the world with extremely high contribution rates. David is a Highly Compensated Employee (“HCE”), with a salary upwards of $400,000. As such, David has a large portion of his salary diverted into CPF through employer contributions. In addition, David contributes a significant portion of his own salary into the CPF.
David is also a US citizen and has to report the CPF each year to the United States.
What about the CPF Tax Liability (Contributions, Deductions and accrued Growth) to David?
Provident Funds – Employer Contributions
Since the mid-1990s, the IRS has taken the position that employer contributions to the CPF on behalf of the employee are not deductible by the employee and must be considered to be income. For example, if an employer was to contribute $30,000 of David’s salary into the CPF, that $30,000 is to be considered income by David, and David would therefore have to pay U.S. tax on the employer contribution portion to the Provident Fund now — as opposed to the U.S. recognizing tax-deferred treatment in which that income which was diverted into the CPF would not currently be taxed, such as when a U.S. Employer contributes to an employee 401K plan .
Provident Funds – Employee Contributions
Moreover, unlike a 401(k) in which an employee can contribute to the 401(k) and receive tax-deferred treatment on the contributions — (since a 401(k) is tax-deferred and the recipient does is not taxed until the money is distributed) –David does not receive a tax-deferred benefit.
In other words, if David decides to contribute $25,000 of his pretax salary towards the CPF, he still needs to report the the contributed amount as part of his current income (aka he cannot “deduct” the pretax contributions from his overall current tax liability)
Provident Funds – Accrued Earnings
This is a very complex issue.
The reality is, because the United States does not recognize tax-deferred status on a CPF (employer or employee contributions), and there is no tax treaty with many of the countries which utilize Provident Funds as a retirement vehicle – the going theme is that the non-distributed accrued earnings are presently taxable.
In other words, if David’s CPF earned $7,000 in dividends and interest — even though David cannot access the money now, he would still have to pay tax on the non-distributed earnings. The theory is that because the United States does not recognize tax-deferred treatment of either the employer or employee contributions to the fund, then by default the accrued but not distributed earnings should be taxed (and not receive tax-deferred treatment either).
It should be noted, that once David pays tax on the non-distributed earnings, it will increase his basis in so far as he will not be paying double-tax in the future, on the same income.
Example: Let’s say David was properly paying U.S. tax on all of his employer contributions, employee contributions and accrued earnings, to the tune of $500,000. Once David begins to withdraw his money, David will not be taxed on the first $500,000 – or whichever amount David has already paid taxed on. In addition, future distributions based may be taxed as a hybrid, to ensure that the portion of the distribution which is “principal” is not taxed, versus the portion that is income generated on the principal – which has not yet been taxed.
In other words, it is not as it David is being double taxed (save for the fact that many provident funds are not taxed at distribution), but rather, David is being taxed now while the earnings accumulate – as opposed to later when the earnings are distributed (as to the portion of the distributions which is considered to have been already taxed).
Does the U.S. Tax My Superannuation Fund?
The United States has entered into tax treaties with upwards of 60 different countries, including Australia. The tax treaties are used to determine certain benefits for individuals with income, investments, assets, etc between the two countries so that citizens/residents of each country will have an idea of their tax liability – as well as receive some additional benefits such (as no double taxation, and reduced tax rates for investments between the two countries).
In other words, the U.S. enters into tax treaties (typically) with countries it “likes,” and wants to foster an ongoing positive relationship with.
Superannuation and U.S. Tax Treaty Language
In order to keep it nice and confusing, the Australian Tax treaty does not make any specific reference to superannuation funds. Even though the superannuation fund scheme has been in place for many years, the treaty simply does not directly reference superannuation funds.
*For example, some treaties have a very expansive description of retirement, pension and Social Security – such as the tax treaty with the UK.
Nevertheless, in accordance with the Australian treaty, it would seem that the United States has the right to tax pension payments received by an individual residing in the United States (even from an Australian Employer) unless it is a government or public pension issued for service performed in Australia (in which Australia would have the right to tax the public/government pension).
What is Form 8854?
Form 8854 is a form required by individuals who have expatriated from the United States. This area is very complex, so for purposes of this article, we will deal with the question that is most common to us — What happens if I’m not in tax compliance for the last five years?
A covered expatriate generally involves individuals who make good money and have significant assets. But, the IRS is a bit sneaky and created a third way to get people to still be subject to US tax even after they have long left the United States.
In a nutshell it goes like this: if you reside in the United States for at least eight (8) of the last 15 years then when you expatriate, you are considered a long-term resident. When you file your first expatriate statement form 8854 it will ask you certain questions, but the most important question for these categories of individuals is whether they can show they have been in tax compliance for at least the last five (5) years.
If the person cannot show their tax compliance for the last five years, then they are considered to be covered expatriate and could be subject to additional US tax in the future-even though they have relocated abroad.
Thus, even as an expat who relinquished their green card, or US citizen who announced their citizenship – the IRS will still require them to continue filing a US tax return and pay tax each year until they can certify that for at least five years there properly complied with US tax law.
How do I Get Into Compliance?
If you are out of US tax compliance and are interested in getting back into US tax compliance, one of the safest and most effective methods doing so is through the IRS offshore voluntary disclosure program.
The following summary below details the three main aspects of the IRS offshore disclosure program. In addition, the person does not want to submit directly into the program they may be able to consider reasonable cause an attempt the penalty waiver – that would depend specifically on the facts and circumstances of the individuals tax situation:
IRS Voluntary Disclosure of Offshore Accounts
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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