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 because they simply never knew they had to include these earnings on their tax return.
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.
Some of these foreign income amnesty programs offer significantly reduced penalties — and even penalty waivers.
How does the IRS Know?
This is one of the first concerns for most taxpayers — Does the IRS know? and more specifically How doe 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 Institution) 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 report 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 a foreign tax credit so that you are not paying double tax.
Here is What You Should Do
Before getting to concerned, it is important to speak with experienced counsel. Oftentimes, it is not as bad as the internet wants you to believe it. Then, after you have properly assessed the situation, you should be sure to speak with experienced counsel to discuss the specifics of the different options you may have available to you.
How to Hire Experienced I Counsel?
Generally, experienced attorneys in this field will have 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
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 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.
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+.
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.