US Taxation of Expats Abroad Hired by a Local Employer

Expats Working Abroad and Moving from an American to Local Employer

Expats Working Abroad

It is not uncommon for a US Taxpayer to begin working on assignment overseas as an expat for a United States company and then transfer to a ‘local contract’ with a foreign-based employer. In the situation in which the Taxpayer works for a US company, oftentimes the US company will provide tax services while the person is employed overseas. This will typically also include tax equalization to ensure the taxpayer is not paying any more or any less tax than they would otherwise pay had they been working domestically in the US. But, when a Taxpayer abroad moves to a local contract and is working for a local employer in that foreign country, it can get complicated. Oftentimes the expat will be the only (or one of a few) US person who works for the foreign company – and so US tax services may not be provided. Let’s take an introductory look at what expats may want to consider when moving to a local employer.

Expats are Still Subject to Worldwide Income Taxation

It is very important for US persons to take note of the fact that the United States is one of only a handful of countries that follows a Citizenship-Based Taxation model. That means that whether a person is considered a US Citizen, Lawful Permanent Resident, or other US resident that meets the Substantial Presence Test, they are taxed on their worldwide income — no matter where they live and no matter if the income is sourced in the United States or abroad. Thus, when an expat works abroad for a local, non-US employer they are still required to report their worldwide income and file annual tax returns.

Taxes Still Due (FEIE and FTC)

As a US person, an Expat is still required to file annual tax returns on Form 1040. In other words, even if the Expat lives overseas, they are still considered a US person for US tax purposes and are therefore required to file Form 1040 and not Form 1040-NR. A Form 1040-NR is for non-tax residents, which typically includes Taxpayers who are non-US persons with US-sourced income and certain US Persons who have made treaty elections on Form 8833 to be treated as non-US Persons (generally limited to permanent residents and not US Citizens). Taxpayers abroad may qualify for Foreign Tax Credits and the Foreign Earned Income Exclusion.

Foreign Reporting (FBAR, FATCA, and More)

In addition to having to report worldwide income, taxpayers are also required to report their global assets when they meet certain threshold reporting requirements. The Expat reports these foreign accounts, assets, and investment information on various international information returns such as the FBAR, Form 8938, Form 5471, Form 3520/3520-A, etc. The forms are not necessarily due at the same time as a tax return is due and taxpayers are required to file many of these forms even if they do not meet the threshold requirements for having to file a tax return. The failure to file these forms may result in significant fines and penalties although oftentimes they can be minimized or eliminated with one of the international tax amnesty programs.

If an expat is out of compliance with US tax or reporting, they may want to consider one of the different offshore disclosure programs such as the streamline procedures, delinquency procedures, or reasonable cause in order to safely get back into compliance.

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.