I Did Not Report Foreign-Earned Income for U.S. Taxes (2024)

What if I Missed Foreign-Earned Income on My Federal Return?

I Have Not Reported Foreign-Earned Income for U.S. Taxes

Each year that a taxpayer is deemed a U.S. person for tax purposes, they are required to include their worldwide income on their U.S. tax return – including both earned income and passive income. This is true, even if the taxpayer resides overseas and earns all their income from foreign sources. When a taxpayer realizes that they did not report their foreign-earned income on their prior federal tax returns, they should consider what their options are to get into compliance. There are several factors to be aware of once the taxpayer realizes they missed foreign earned income. Depending on whether they pay taxes abroad, qualify for the foreign earned income exclusion, or otherwise can make a treaty election will help determine whether they have any tax liability.

Example of Unreported Foreign Earned Income

Here is a common example that we see often: Peter is a Lawful Permanent Resident who works in a foreign country. He earns about $600,000 annually from his foreign employer and pays foreign taxes on the income generated in the foreign country. Peter does not have much of any US sourced income and was under the mistaken impression that therefore he was not required to report his foreign earned income on his US tax return.

Foreign Earned Income and Housing Exclusion

First, presuming that Peter can prove that his tax home is a foreign country and that he qualifies for either the Physical Presence Test or Bona Fide Residence Test, he may qualify for the Foreign Earned Income Exclusion (FEIE) and housing exclusion. By qualifying FEIE, he can exclude up to $120,000 of his income on his US tax return by filing IRS Form 2555. Likewise, he can also deduct certain housing expenses presuming he has them, and they qualify for the housing deduction. Noting, taxpayers who file their taxes Married Filing Jointly and both qualify for the Foreign Earned Income Exclusion can both claim the exclusion on their tax return, but of course cannot double dip on the housing.

Foreign Tax Credits

In addition to qualifying for the foreign-earned income exclusion, Peter may also qualify for foreign tax credits. At the time of filing his returns, Peter should assess how much foreign taxes he has paid and whether it may benefit him to use a hybrid of Foreign Earned Income Exclusion/Foreign Tax Credit strategy or whether it is better to just apply foreign tax credits– which will all depend on various factors, including what tax rate he paid overseas. After applying the foreign earned income exclusion and foreign tax credits, Peter may still have a U.S. tax liability or may have additional credits to carry forward in future years.

Possible Treaty Election

Peter may also qualify for a treaty election if he resides in a treaty country and can show that he has significant contacts with the foreign country. If Peter qualifies, he may consider filing a Form 1040-NR along with an 8833 treaty election instead of a Form 1040. This would result in Peter only paying U.S. tax on his US-sourced income and not his worldwide income. There are various tax pitfalls and landmines to be cognizant of before going off and filing Form 8833 and 1040NR instead of Form 1040 — especially if Peter already qualifies as a Long-Term Lawful Permanent Resident.

International Information Reporting

In addition to having to report his foreign earned income and foreign passive income such as dividends, interest, capital gains, and royalties, Peter must also report his foreign assets, accounts, and investments on various international information reporting forms each year. The failure to do so may result in significant fines and penalties although Peter may qualify for one of several offshore/international tax amnesty programs.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms and do not believe they will qualify for the the reasonable cause exception, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer 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 who 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. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

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.