- 1 10 International Tax Tips
- 2 Worldwide Income
- 3 Review the U.S. Income Tax Treaty
- 4 Totalization Agreements
- 5 Foreign Tax Credits
- 6 Foreign Earned Income Exclusion
- 7 FBAR
- 8 FATCA Form 8938
- 9 Foreign Investments, PFIC & Form 8621
- 10 Foreign Trusts, Partnerships, or Businesses
- 11 IRS Penalties Offshore Accounts
- 12 Get Into Compliance with IRS Offshore Disclosure
International Tax Tips 2018 – A Guide to U.S. Taxes, FBAR & FATCA
International Tax usually involves very complex areas of tax law. Moreover, the information provided by the IRS is usually ambiguous…at best.
With introduction and enforcements of FATCA, coupled by the increased in enforcement of fines and penalties associated with International Tax law, it is important to understand the basics of what you should be on the lookout for, when preparing your 2017 tax returns.
10 International Tax Tips
With 2017’s tax returns coming due in the next few months, we want to provide a brief synopsis of important international tax issues for you to stay aware of when you are preparing your tax returns. These are by no means the only issues to consider, but they are some of the more common issues that are presented to us at Golding & Golding.
The United States is a Citizen-Based Taxation country (CBT). That does not mean you have to be a “Citizen” (or even residing in the U.S.) to be taxed by the United States. It means that if you are a US person such as a U.S. Citizen, Legal Permanent Resident, or Foreign National who meets the Substantial Presence Test, then you have to pay US taxes just as it you are a U.S. Citizen. And, the U.S taxes you on your worldwide Income.
Therefore, if you earned income in a different country, you still have to report that income on your U.S. tax return. It does not matter if the income is not taxed in the foreign country, and it does not matter if it is exempt in the United States – it still must at least be included in your US tax return.
Golding & Golding International Tax Resource: U.S. Worldwide Taxation Rules
Review the U.S. Income Tax Treaty
United States has entered into income tax treaties with more than 50 countries. While many of these treaties are nearly identical in content, they often will have nuances and differences — especially on issues involving retirement, pension and Social Security (usually Paragraphs 16-20 of the Treaty.)
While general proposition contained in many treaties is that the country of residence is usually the country that has the opportunity to tax individuals on issues such as retirement, these rules are not linear and there are exceptions, exclusions, and limitations depending upon the specific country, the specific treaty, and the specific type of income.
Golding & Golding International Tax Resource: We recommend searching our Tax Library for the specific country
The United States has entered into totalization agreements with around 25 different countries. This is important, especially if you are a U.S. person living overseas who is self-employed in a foreign country. That is because in accordance with the totalization agreement, you may have a Social Security payment responsibility in only one country, but not the other.
Is important to note that the totalization agreements are not identical, and vary even between neighboring countries. For example, the United States has entered into a totalization agreement with Australia, but has not entered into a totalization agreement with New Zealand.
Golding & Golding International Tax Resource: Understanding Totalization Agreements
Foreign Tax Credits
If you already pay tax in a foreign country on income you earn in a foreign country, you may receive a credit for that tax in the United States on the income. So for example, if you earned $50,000 of interest income in Portugal and paid 11% tax, then when you report that income under US tax return you will also include the taxes paid on a form 1116.
There is an equation that is used to ensure that none of the foreign tax is used to offset US tax on US income so it is not always a dollar per dollar credit – but it is a nice benefit, and often times comes close to a 75% – 100% tax credit.
Golding & Golding International Tax Resource: Foreign Tax Credit vs. Foreign Earned Income Exclusion; High-Tax Kick-Out
Foreign Earned Income Exclusion
Over the last few years we have seen many inexperienced practitioners using the exclusion for clients in which it does not apply. In order to claim this exclusion, you have to meet either the Physical Presence Test or the Bona-Fide Residence Test. If you have not lived outside the country for at least 330 days in any 12 month period, you will not qualify for the Physical Presence Test. And, if you live the majority of the time in the United States, you will presumably not qualify for the Bona-Fide Residence Test.
Also, you cannot switch back and forth each year between the two separate tests, so it is important to work with a practitioner who understands the application of the exclusion and when it qualifies.
The exclusion is a bit of a red flag so if you are on that cusp of believing you may qualify or not qualify, you should have your ducks in a row at the time of the tax return submission.
Golding & Golding International Tax Resource: Foreign Earned Income Basis; Foreign Tax Credit vs. Foreign Earned Income Exclusion;
We have written hundreds of articles on this subject already, including Case Studies, Examples, and FAQ. The FBAR is the Report of Foreign Bank and Financial Account Form. It is required to be filed by any individual who has more than $10,000 in annual aggregate total, in foreign accounts on any day of the year. Is not filed along with your tax return; it is filed separately, electronically with the Department of Treasury on that FinCEN website. It is due at the same time your tax return is due – including extensions.
If you are out of compliance for prior years, this is not the form to quietly disclose. In other words, if you are out of compliance, then you should speak with an experienced offshore disclosure attorney to prepare strategy for getting into compliance.
If you only just learned about this form and are about to file your first FBAR, but you were required to file in prior years, do not file the form until you have spoken with an attorney.
FATCA Form 8938
FATCA is the Foreign Account Tax Compliance Act. It is required in order to disclose certain specified foreign assets (which may also include accounts). It is similar to the FBAR, but different in many respects. First, it is filed along with your tax return as a form accompanying your 1040. Second, it does not have the same threshold requirements as the FBAR. Threshold requirements are much higher so that less people have to file the form. The threshold requirements vary based on marital status and residence. Third, unlike the FBAR, FATCA Form 8938 requires that you include the income that was generated from the specified foreign assets included on form 8938.
Foreign Investments, PFIC & Form 8621
If you have investments overseas such as a foreign mutual fund, or you are the owner of a foreign corporation that manages investments and you meet the requirements of it being a PFIC, then your tax return just became infinitely harder to prepare. Whether or not you will have to file a form 8621 will be determined by the value of the PFIC assets, whether you or your CPA ever made an election, etc. In addition, depending on whether you have ever made a previous election for the specific assets, and/or whether or not you have any distributions/ excess distributions will impact the preparation of the tax analysis.
The reason why this form 8621 is so important, is because if it is not filed when it is supposed to be filed — then your tax return is considered incomplete and the statute of limitations does not begin to run yet.
Foreign Trusts, Partnerships, or Businesses
Depending on whether or not you have sufficient interest, control, or ownership of a foreign business or trust may determine whether or not you have to file other tax forms such as Form 3520, 5471, or 8865.
These forms are considerably complicated, especially for somebody who is not in the business of preparing international tax returns. Moreover, ever since the Internal Revenue Service has made international tax enforcement a mainstay and priority, the penalties that the IRS may issue for individuals out of compliance have increased exponentially.
As a result, if you have any sort of interest or ownership (or control) over foreign business or trusts, it is important to determine what your filing requirements are before submitting your tax return to the IRS.
IRS Penalties Offshore Accounts
The following is a summary of penalties as published by the IRS on their own website:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Underpayment & Fraud Penalties
Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Even Criminal Charges are Possible…
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
Get Into Compliance with IRS Offshore Disclosure
If you are already out of compliance for prior years, it is important to speak with an experienced IRS Offshore Voluntary Disclosure Lawyer before submitting any further documents or tax returns to the IRS.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
Latest posts by International Tax Lawyers - Golding & Golding, A PLC (see all)
- Can I Rely on Tax Lawyer Advice to Conceal FBAR Info from CPA? - August 15, 2019
- Beware of Aggressive Tax Attorneys & “Insider Secret IRS Knowledge” - August 14, 2019
- Texas Sized FBAR Penalty & Importance of Experienced FBAR Counsel - August 14, 2019