- 1 International Tax and Reporting Explained
- 2 International Tax & Offshore Disclosure Example
- 3 International vs Offshore vs Foreign
- 4 Why is Charles a US Person
- 5 Worldwide Income
- 6 Schedule B – Foreign Accounts, Interest & Dividends
- 7 Schedule C for Consulting Business
- 8 Schedule D for Stock Sales
- 9 Schedule E for Foreign Rental Property Income
- 10 Form 8938 Foreign Assets
- 11 Form 8621 Foreign Mutual Funds
- 12 FBAR Foreign Bank & Financial Accounts
- 13 International Tax Amnesty
- 14 Can I Just Start Filing & Reporting This Year Instead?
- 15 Our International Tax Lawyers Represent Clients Worldwide
International Tax and Reporting Explained
International Tax and Reporting Explained in Layman’s Terms: When a Taxpayer approaches us with an International Tax Law issue, oftentimes the experience can de extremely daunting for them. After realizing they may have missed one or several of the IRS international tax law filing and reporting requirements — they are usually very scared and overwhelmed. And, for every accurate piece of information they find on their intenet research quest — they will also encounter countless websites detailing all the potential criminal enforcement activities that the IRS and US Government may take for noncompliance — without putting it into proper context. These websites also fail to inform the general public that the chance of being criminally investigated for offshore noncompliance is pretty low — and most of the time, violations are civil in nature — and can be resolved without any criminal impact. Let’s walk through the very basics of international tax and offshore reporting for individuals.
International Tax & Offshore Disclosure Example
Here is a common example of an international Taxpayer: Charles is a Lawful Permanent Resident who resides in the United States. He has been a Permanent Resident for 10-years and he has foreign accounts and rental property outside of the United States that generates income. He also owns a few foreign Pension Plans — and a small consulting business that helps small foreign companies outside of the US.
International vs Offshore vs Foreign
The Internal Revenue Service uses various terms interchangeably that mean the same thing in the context of U.S. Tax. Thus, whether or not the IRS publication uses the term international, offshore, overseas, foreign or abroad — it all refers to money, accounts or assets from outside of the United States.
Why is Charles a US Person
A US person individual includes: U.S. Citizens, Lawful Permanent Residents and Foreign National non-permanent residents who meet the Substantial Presence Test. Therefore, even though Charles is a citizen of another country — since he is a legal permanent resident of the United States — he is considered a US person.
Since Charles is a US Person, he is taxed on his worldwide income — and must report his global assets.
The United states Taxes US Person individuals on their worldwide income. That means that whether or not the individual resides in the United States or abroad — and whether or not their income is generated from US sources or foreign sources — it is all taxable by the IRS (exceptions, exclusions and limitations may apply). It also means he has to report his foreign assets and accounts to the US Government (see below).
Schedule B – Foreign Accounts, Interest & Dividends
Even if Charles does not have foreign accounts, he would be required to report his US or Foreign interest and dividends on Schedule B if it exceeded $1500 in total. Even though Charles has less than $1500 in interest in dividends, he does have ownership or signature authority over a foreign account — and therefore must file a Schedule B.
Schedule C for Consulting Business
Schedule C is used to report self-employment. Even though Charles conducts his consulting for businesses located outside of the United States, he is a US person and therefore must file the Schedule C to report his foreign income. Since he is self-employed, he also has to pay self-employment tax. Even if there was a totalization agreement with the foreign country where he conducts business, he is operating from within in the United States for a US employer (himself) and so typically the totalization agreement would not apply —
Schedule D for Stock Sales
Since Charles had some capital gains by selling some of his foreign stock, Charles would also file a schedule D and form 8949 similar to report the sale of either his US or foreign stock.
Schedule E for Foreign Rental Property Income
Charles also generates rental income from a foreign property he owns abroad. Despite the fact that the income is generated from a foreign rental property, it is still included on schedule E — and the income is still taxable because Charles is a US person.
Form 8938 Foreign Assets
Charles files single, and therefore he is required to file a Form 8938 because the value of his specified foreign financial assets exceeds the threshold requirements for a single person who resides in the United States. The threshold for filing Form 8938 (unlike the FBAR) varies depending on whether Charles resides in the United states or abroad — and whether or not he files married or single/separate.
Form 8621 Foreign Mutual Funds
Since there are also some Mutual Funds and SICAVs — and the total value exceeds $25,000 per year — Charles will also have to file a Form 8621. there were some distributions as well, so Charles will have to conduct a detailed tax analysis of the funds to determine whether or not he has any excess distributions.
FBAR Foreign Bank & Financial Accounts
The FBAR (aka FinCEN Form 114) is used to report Foreign Bank and Financial Accounts directly to FinCEN in each year the threshold requirement for reporting is met. The FBAR is filed separately from the tax return — and is currently due at the time the tax return is filed, although it is an automatic extension through October. It is important that Charles file the FBAR timely as to avoid any fines and penalties.
International Tax Amnesty
If Charles missed any reporting and filing requirements in prior years, then he may consider submitting to one of the amnesty programs in order to safely get into offshore compliance with the US government. These Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs, include:
- Voluntary Disclosure Program (VDP or “New” OVDP)
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Delinquency Procedures
- Reasonable Cause
Can I Just Start Filing & Reporting This Year Instead?
No, unless the current year is the first-year you had a filing or reporting requirement. Otherwise, if you had a prior year requirement, but only begin to start filing in the current year (Filing Forward) it is illegal. In the world of offshore disclosure, this is referred to as an FBAR Quiet Disclosure. The IRS has warned taxpayers that if they get caught in a Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.
Our International Tax Lawyers Represent Clients Worldwide
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.