Each year we represent hundreds of clients from around the world. We have helped clients in over 50 different countries get into compliance with U.S. tax filings.
Even though each person has their own unique set of facts as to why they are out-of-compliance — one common scenario we deal with often is when a person is a U.S. Citizen, becomes an Expat, and falls out of tax compliance.
- 1 International Tax Law Compliance
- 2 Do You Qualify as a Foreign Resident?
- 3 Want to Learn More About Streamlined Foreign Procedures?
- 4 I Just Learned about FATCA and FBAR
- 5 What is FATCA?
- 6 What am I supposed to Report?
- 7 Reporting Foreign Accounts – FBAR aka FinCEN 114 aka TD F 90-22.1
- 8 Reporting Specified Foreign Assets – FATCA Form 8938
- 9 Other Forms – Foreign Business
- 10 Reporting Foreign Income
- 11 Golding & Golding, A PLC
International Tax Law Compliance
There are many rumors and misinformation circulating worldwide regarding which U.S. tax documents (if any) you are required to file when you reside outside of the United States.
Some individuals believe that once they have lived outside the United States for at least 25 years, they are no longer required to file U.S. Tax Returns (this is incorrect). In addition, other individuals believe that unless they make at least $100,000 a year, they do not have to file a US tax return (this is also incorrect, although under certain tax rules they may have no tax liability — Foreign Earned Income Exclusion).
As a result, many Expats just stopped filing US tax returns. If you are out of tax compliance, you should consider getting back into compliance before the IRS audits you, issues fines or penalties, authorizes a customs hold, revokes your passport or otherwise liens, levies, or seizes your US or foreign property.
This is not intended to scare you, but the fact of the matter is that since you already in the U.S. Tax system and have a Social Security Number (not just an ITIN) the chances of you being audited is higher. Moreover, if you are audited before you have the chance to proactively tell the IRS your story, then the fact that you suddenly stopped filing returns and/or FBARs may make you appear willful, when it was actually non- willful
Moreover, if you qualify as a foreign resident then you may qualify to receive a Full Penalty Waiver.
Do You Qualify as a Foreign Resident?
For those of you who are unaware, the United States developed the streamlined form offshore procedures to assist individuals who reside overseas but otherwise have a US tax liability.
In order to qualify as a foreign resident a person must either a US citizen and/or legal permanent resident and have resided outside of the United States for at least 330 days in any one of the last three tax years.
Alternatively, if a person is not a US citizen or legal permanent resident, but does have to file US taxes in case he or she met the substantial presence test then that person must show that they do not meet the substantial presence test for at least one of the last three taxes.
If a person can meet the foreign resident requirements, the IRS has agreed to waive all penalties, as well as except un-filed returns for prior years.
Want to Learn More About Streamlined Foreign Procedures?
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test) you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver, and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due.
I Just Learned about FATCA and FBAR
Did you recently learn you were supposed to be reporting your foreign accounts, assets and income?
Maybe it was because you received a FATCA Letter were educated by friends or family, or overheard a conversation while you were out.
Whether you are a U.S.Citizen who has Offshore Investments, a Legal Permanent Resident/Green-Card Holder who never closed your foreign accounts, or an individual who meets the “Substantial Presence Test” and still have literally no idea why as a Noncitizen/Nonlegal Permanent Resident you are somehow required to report your foreign accounts to the US, you are in a bit of a legal bind.
Moreover, with the introduction of FATCA (Foreign Account Tax Compliance Act) the chances have significantly increased that you may get caught with being out of compliance.
Nevertheless, Golding & Golding can work with you to cost-effectively submit to the Streamlined Foreign Offshore Disclosure Procedures and fix this “mess” quickly.
What is FATCA?
FATCA is a recent law that was enacted in 2010 and put into effect in 2014. The main purpose behind FATCA is to reduce offshore tax evasion and moving money from the United States to offshore/hidden/secret accounts.
More than 100 countries have entered into agreements (or agreements in substance) with the United States to enforce FATCA. Moreover, several thousands of Foreign Financial Institutions have agreed to comply with FATCA and report taxpayer information to the United States.
For you, the non-willful taxpayer, it is very difficult because under these new laws and guidelines almost everyone who fails to be in compliance with these new (and prior/existing) laws are considered to be “a bad guy or gal.” Thus, if you’re out of compliance it is very important to quickly get back into compliance using the Streamlined Program, which we would detail below.
*A word of caution: if you were willful then streamlined compliance procedures do not apply to your situation. Do not be fooled into thinking you could sneak one by the IRS by entering streamlined when you are willful; it is not worth the gamble.
*While there is no specific definition of willful, it is pretty clear to any experienced offshore disclosure attorney when someone is willful. Thus, you should always speak with an experienced attorney to discuss your matter before making any decision about moving forward.
What am I supposed to Report?
There are three (3) main aspects to dealing with foreign money. The first aspect is reporting your foreign account(s) the second aspect is reporting certain specified assets, and the third aspect is reporting your foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… Not the least being a criminal investigation.
*The majority of individuals are usually non-willful, and this article will focus specifically on non-willfulness and the Streamlined Foreign Offshore Disclosure Procedures/Program.
Reporting Foreign Accounts – FBAR aka FinCEN 114 aka TD F 90-22.1
There are many different types of accounts that need to be reported on an annual basis. For purposes of this article, we are going to keep it very simple: if you have more than $10,000 overseas in foreign accounts at any time during the year, whether the money is in one account or spread over numerous accounts, then you are required to file an annual FBAR aka FinCEN 114. For more information about FBAR specific, please click the following: Golding & Golding’s Comprehensive FBAR FAQ from the Trenches.
This form is filed online directly with the Department of Treasury. The failure to file this form timely can result in significant fines and penalties (see above). Moreover, there is no authorized method for filing the FBARs late, aside from a formalized method such as offshore disclosure. If you just go ahead and file them, you have committed a crime known as “quiet disclosure.”
*Quiet disclosures can be fixed so if you did commit one, it is better to “put out the file while it is small” and go through the proper channels, as opposed to letting it linger, having it turn into an inferno…and risking a criminal investigation.
FBAR Delinquency Procedures still require some disclosure and is not the same as “Quiet Disclosure”
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation it may not need to be reported on the FBAR, but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
Whether or not you have the file in 8938 will depend on whether you are married filing jointly or married filing separate/single or whether you are considered a US resident or foreign resident. If you’re residing in the United States and therefore applying the streamlined foreign offshore disclosure program a.k.a. streamline compliance filing procedures then the threshold is as follows:
– If you are single or married filing separate the threshold requirement is $50,000 on the last day of the year or $75,000 at any time during the year.
– If you are married and filing married filing jointly the threshold requirements are doubled, so that it is $100,000 on the last day of the year or hundred and $50,000 at any time during
Other Forms – Foreign Business
While the FBAR and 8938 are the two most common forms, please keep in mind that there are many many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift you may have to file a 3520.
- If you are the Owner of a foreign trust you will also have to file a 3520-A.
- If you have certain Ownerships of a foreign corporation you have to file a 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file and 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident, which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country, or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return, and pay any differential in tax that might be due.
In other words, if you earn $100,000 in Japan and paid 25% tax in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability would be less than $25,000 then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you would have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket) then you have to pay the difference to the U.S. Government.
Golding & Golding, A PLC
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.