Is there a Penalty for Not Reporting Foreign Income
Penalty for Not Reporting Foreign Income: If you have income from overseas that you did not report to the IRS, you are not alone. The reason many U.S. taxpayers do not report foreign income is that they simply never knew they had to include these earnings on their tax returns. The U.S. is one of the only countries worldwide that requires worldwide income reporting on the 1040 tax return. In addition, the Internal Revenue Service does not make it easy for taxpayers with overseas earnings to understand what they are required to report. Many of the IRS publications are antiquated, and not updated to reflect changes and updates to international tax law. Luckily, the IRS does provide various voluntary disclosure tax amnesty programs to help non-compliant taxpayers get into income and foreign accounts compliance. Some of these foreign income amnesty programs offer significantly reduced penalties — and even penalty waivers.
How does the IRS Know?
One of the foremost concerns for most taxpayers is:
Does the IRS know about my unreported foreign accounts; and
How does the IRS know?
One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institutions) in over 110 countries actively report account holder information to the IRS.
Alternatively, you may be audited or be outed by a pesky whistleblower.
Unsure What Overseas Income Goes on a Tax Return?
The following are common questions and answers we receive often:
The Money was Earned Overseas?
If you are subject to US tax or qualify as a U.S. taxpayer (US citizen, Legal Permanent Resident, work visa holder and/or or someone who meets the Substantial Presence Test), then the United States taxes you on your worldwide Income. It does not matter if the money was earned overseas – it still must be identified and reported on your tax return. Depending on the type of income and how long you resided overseas you may qualify for a Foreign Tax Credit or Foreign Earned Income Exclusion – but you are still required to disclose the income on your tax return.
My Foreign Real Estate does not Generate “Profit”?
If you earn $10,000 a year in foreign rental income and you have $10,000 a year and expenses, then you have netted zero. This just means you did not earn a “Profit”; it does not mean you didn’t earn any income and/or are exempted from reporting it on your tax return; rather, you are required to both reports the income, as well as the expenses if you are claiming them.
My Foreign Income is not Taxed Overseas?
Whether it is because your foreign rental income does not meet the minimum threshold requirements for having to file a tax return in the foreign country and/or you are earning passive income (interest, dividends, capital gains) in a country that does not tax passive income (very common in Asian countries), it does not exempt you from reporting it on your US tax return.
Unfortunately, if you are subject to US tax on your worldwide income and earned foreign income in a jurisdiction that does not tax the particular category of foreign income, you still must report and pay U.S. tax on those earnings.
But I Already Paid Foreign Taxes?
This is also very common: whether it is because you actively pay tax in a foreign jurisdiction on your earnings, and/or the bank withholds a certain amount of tax from your passive earnings (bank interest), you still have to report the income on your US tax return. In this scenario, you will generally be allowed to apply for a foreign tax credit so that you are not paying double tax.
What if you are Noncompliant?
Speak with experienced counsel.
Oftentimes, it is not as bad as the internet wants you to believe it.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.