- 1 U.S. Tax on Worldwide Income
- 2 You May Not be Taxed on the Income
- 3 Review the U.S. Income Tax Treaty
- 4 Totalization Agreements
- 5 Foreign Tax Credits
- 6 Foreign Earned Income Exclusion
- 7 FBAR
- 8 FATCA Form 8938
- 9 Foreign Investments, PFIC & Form 8621
- 10 Foreign Trusts, Partnerships, or Businesses
- 11 We Specialize in Safely Disclosing Foreign Money
- 12 Who Decides to Disclose Unreported Money?
- 13 IRS Penalty List
- 13.1 Failure to File
- 13.2 Failure to Pay
- 13.3 Civil Tax Fraud
- 13.4 A Penalty for failing to file FBARs
- 13.5 A Penalty for failing to file Form 8938
- 13.6 A Penalty for failing to file Form 3520
- 13.7 A Penalty for failing to file Form 3520-A
- 13.8 A Penalty for failing to file Form 5471
- 13.9 A Penalty for failing to file Form 5472
- 13.10 A Penalty for failing to file Form 926
- 13.11 A Penalty for failing to file Form 8865
- 13.12 Fraud penalties imposed under IRC §§ 6651(f) or 6663
- 13.13 A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
- 13.14 A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
- 13.15 An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
- 13.16 Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
- 13.17 A person convicted of tax evasion
- 14 What Should You Do?
- 15 Be Careful of the IRS
- 16 4 Types of IRS Voluntary Disclosure Programs
Green Card Holder & Foreign Income (2018) – U.S. Tax, FATCA & FBAR
One of the more confusing parts of US tax law is understanding how the United States taxes individuals on their worldwide income, offshore accounts and foreign assets.
With the 2017 tax return coming due over the next few months, we want to try to provide some basics to assist you with understanding what the IRS requires.
U.S. Tax on Worldwide Income
United States is one of the few countries in the world that taxes individuals on their worldwide income.
Therefore, if you are a Green-Card Holder/Legal Permanent Resident then you will be taxed just as if you were a US citizen. As a result, whether or not you reside in the United States or outside of the states, you are required to file a tax return.
Moreover, whether or not the income you earn is sourced in the United States or outside of the states, does not mater — you are required to report all of this income under US Tax Return.
You May Not be Taxed on the Income
There’s a distinction regarding reporting the income on your US tax return and paying US taxes. All of your income you earn worldwide should be included on your taxes. With that said, you may be entitled to an exclusion or foreign tax credit(s) for taxes paid abroad. This can be the result of qualifying for the foreign earned income exclusion, or being able to take a treaty position.
For example, you may be receiving pension benefits from a government pension abroad, which may only be taxable in the foreign jurisdiction. That does not mean it is excluded from your tax return (you still include the income in your tax return), but you do not have to pay U.S. tax on it, because it is an exception/exclusion.
Depending on the type of exception or exclusion you are relying upon, you may have to file additional documentation with your taxes.
Golding & Golding International Tax Resource: U.S. Worldwide Taxation Rules
Review the U.S. Income Tax Treaty
United States has entered into income tax treaties with more than 50 countries. While many of these treaties are nearly identical in content, they often will have nuances and differences — especially on issues involving retirement, pension and Social Security (usually Paragraphs 16-20 of the Treaty.)
While general proposition contained in many treaties is that the country of residence is usually the country that has the opportunity to tax individuals on issues such as retirement, these rules are not linear and there are exceptions, exclusions, and limitations depending upon the specific country, the specific treaty, and the specific type of income.
Golding & Golding International Tax Resource: We recommend searching our Tax Library for the specific country
The United States has entered into totalization agreements with around 25 different countries. This is important, especially if you are a U.S. person living overseas who is self-employed in a foreign country. That is because in accordance with the totalization agreement, you may have a Social Security payment responsibility in only one country, but not the other.
Is important to note that the totalization agreements are not identical, and vary even between neighboring countries. For example, the United States has entered into a totalization agreement with Australia, but has not entered into a totalization agreement with New Zealand.
Golding & Golding International Tax Resource: Understanding Totalization Agreements
Foreign Tax Credits
If you already pay tax in a foreign country on income you earn in a foreign country, you may receive a credit for that tax in the United States on the income. So for example, if you earned $50,000 of interest income in Portugal and paid 11% tax, then when you report that income under US tax return you will also include the taxes paid on a form 1116.
There is an equation that is used to ensure that none of the foreign tax is used to offset US tax on US income so it is not always a dollar per dollar credit – but it is a nice benefit, and often times comes close to a 75% – 100% tax credit.
Golding & Golding International Tax Resource: Foreign Tax Credit vs. Foreign Earned Income Exclusion; High-Tax Kick-Out
Foreign Earned Income Exclusion
Over the last few years we have seen many inexperienced practitioners using the exclusion for clients in which it does not apply. In order to claim this exclusion, you have to meet either the Physical Presence Test or the Bona-Fide Residence Test. If you have not lived outside the country for at least 330 days in any 12 month period, you will not qualify for the Physical Presence Test. And, if you live the majority of the time in the United States, you will presumably not qualify for the Bona-Fide Residence Test.
Also, you cannot switch back and forth each year between the two separate tests, so it is important to work with a practitioner who understands the application of the exclusion and when it qualifies.
The exclusion is a bit of a red flag so if you are on that cusp of believing you may qualify or not qualify, you should have your ducks in a row at the time of the tax return submission.
Golding & Golding International Tax Resource: Foreign Earned Income Basis; Foreign Tax Credit vs. Foreign Earned Income Exclusion;
We have written hundreds of articles on this subject already, including Case Studies, Examples, and FAQ. The FBAR is the Report of Foreign Bank and Financial Account Form. It is required to be filed by any individual who has more than $10,000 in annual aggregate total, in foreign accounts on any day of the year. Is not filed along with your tax return; it is filed separately, electronically with the Department of Treasury on that FinCEN website. It is due at the same time your tax return is due – including extensions.
If you are out of compliance for prior years, this is not the form to quietly disclose. In other words, if you are out of compliance, then you should speak with an experienced offshore disclosure attorney to prepare strategy for getting into compliance.
If you only just learned about this form and are about to file your first FBAR, but you were required to file in prior years, do not file the form until you have spoken with an attorney.
FATCA Form 8938
FATCA is the Foreign Account Tax Compliance Act. It is required in order to disclose certain specified foreign assets (which may also include accounts). It is similar to the FBAR, but different in many respects. First, it is filed along with your tax return as a form accompanying your 1040. Second, it does not have the same threshold requirements as the FBAR. Threshold requirements are much higher so that less people have to file the form. The threshold requirements vary based on marital status and residence. Third, unlike the FBAR, FATCA Form 8938 requires that you include the income that was generated from the specified foreign assets included on form 8938.
Foreign Investments, PFIC & Form 8621
If you have investments overseas such as a foreign mutual fund, or you are the owner of a foreign corporation that manages investments and you meet the requirements of it being a PFIC, then your tax return just became infinitely harder to prepare. Whether or not you will have to file a form 8621 will be determined by the value of the PFIC assets, whether you or your CPA ever made an election, etc. In addition, depending on whether you have ever made a previous election for the specific assets, and/or whether or not you have any distributions/ excess distributions will impact the preparation of the tax analysis.
The reason why this form 8621 is so important, is because if it is not filed when it is supposed to be filed — then your tax return is considered incomplete and the statute of limitations does not begin to run yet.
Foreign Trusts, Partnerships, or Businesses
Depending on whether or not you have sufficient interest, control, or ownership of a foreign business or trust may determine whether or not you have to file other tax forms such as Form 3520, 5471, or 8865.
These forms are considerably complicated, especially for somebody who is not in the business of preparing international tax returns. Moreover, ever since the Internal Revenue Service has made international tax enforcement a mainstay and priority, the penalties that the IRS may issue for individuals out of compliance have increased exponentially.
As a result, if you have any sort of interest or ownership (or control) over foreign business or trusts, it is important to determine what your filing requirements are before submitting your tax return to the IRS.
We Specialize in Safely Disclosing Foreign Money
We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)
Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Examples of areas of tax we handle
- Unfiled Tax Returns
- Unreported Income Penalties
- International Tax Investigations (FATCA and more)
- FBAR Investigations
- International Tax Evasion
- Structuring Investigations
- Eggshell and Reverse Eggshell Audits
- Divorce and Offshore Accounts
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Disclose Unreported Money?
What Types of Clients Do we Represent?
We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
IRS Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
Failure to File
If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.
The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
Failure to Pay
f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.
However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
Civil Tax Fraud
If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.
A Penalty for failing to file FBARs
The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
A Penalty for failing to file Form 8938
The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
A Penalty for failing to file Form 5472
The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
What Should You Do?
Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.
Be Careful of the IRS
With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
Contact Us Today; Let us Help You.
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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