- 1 International Tax Compliance & Offshore Reporting Guide
- 2 Who is a U.S. Taxpayer?
- 3 What does Tax on Worldwide Income (CBT) Mean?
- 4 Foreign Income is Taxable
- 5 What is Offshore Reporting?
- 6 International Reporting Forms
- 7 Filing an Extension (4868 vs 7004)
- 8 Penalties for Offshore Noncompliance
- 9 Disputing an International Tax & Reporting Penalty
- 10 Reasonable Cause, Amnesty & Voluntary Disclosure
- 11 Golding & Golding: About Our International Tax Law Firm
International Tax Compliance & Offshore Reporting Guide
International Tax Compliance & Offshore Reporting Guide: IRS international tax and reporting compliance can be overwhelming, to say the least. The IRS has many, many rules involving the disclosure of foreign accounts, assets, investments, and income. Making matters worse is that noncompliance can often lead to excessive offshore fines and penalties.
Whether it is an FBAR violation or the failure to file certain international information reporting forms such as forms 3520-A, 5471, or 8983 — the penalties alone are intimidating.
The purpose of this article is to introduce basic international tax law concepts to taxpayers who may have just happened upon these tax and reporting requirements.
While it may be easier for noncompliant taxpayers to bury their heads in the sand and wish for the best (not a bad strategy, right?) getting into compliance is usually no big deal and will bring the taxpayer peace of mind in moving forward with tax reporting and compliance in future years.
Who is a U.S. Taxpayer?
We will focus on individual U.S. taxpayers. When it comes to U.S. taxpayer, there are generally four (4) categories of individuals who may be subject to U.S. tax and reporting.
- US Citizen
- Legal Permanent Resident (Green-Card Holder)
- Foreign National who meets the Substantial Presence Test
- Former U.S. person who did not properly expatriate on Form 8854.
When a taxpayer falls into one of these four categories, they are considered a U.S. person for tax purposes – and may be subject to U.S. tax and reporting.
What does Tax on Worldwide Income (CBT) Mean?
The United States is one of the only countries in the world that taxes U.S. persons on their worldwide income. It is referred to as citizen-based taxation or CBT. In most other foreign countries, when a citizen or resident of that country resides outside of that country’s borders, then the home country does not tax the individual unless the income is sourced from that country.
Take the following example:
Peter is a citizen of country A and non-U.S. person.
Peter resides in country B. Peter earns income from country B only.
Since Peter resides in country B and earns income from country B only, country A does not tax Peter on the income earned in country B.
But, if Peter also had income sourced from country A, then country A may still tax Peter on the earnings sourced from country A, even if Peter lives in country B.
In the United States, the rules are different.
Melissa is a U.S. citizen who lives in country B and has earnings in countries C & D, but no income from the United States.
The United States will still tax Melissa on all of her income from all of the foreign countries.
*Melissa may qualify to apply a foreign tax credit and/or the foreign earned income exclusion.
**Treaty rules may impact how the US tax is a particular category of foreign income from a specific country.
Foreign Income is Taxable
When it comes to foreign income and U.S. Tax, the baseline position is that all foreign income is taxable in the United States.
Whether or not the income receives tax-deferred treatment outside of the U.S. does not directly impact whether the foreign income is taxable by the IRS.
Sometimes the foreign income may receive tax-deferred treatment in the United States depending on whether there is a bilateral tax treaty with a foreign country and/or other rules, regulations, procedures, or rulings that may apply to the U.S. tax on foreign income rules.
What is Offshore Reporting?
The offshore tax aspect of being a U.S. person is only one part of the equation.
Equally important is that the U.S. person properly reports all of their foreign assets, accounts, and investments to the US government.
There are a number of different international information forms that may be required to be reported.
Before determining which forms a Taxpayer may have to file, it is important to understand which assets must be reported.
Foreign accounts include more than just bank accounts.
It can be confusing, because the most common form, the FBAR (FinCEN Form 114) refers to bank accounts — but many other accounts may be required to be reported on the other IRS forms as well.
Some common accounts may include:
- Investment Accounts
- Mutual Fund Accounts
- Life Insurance Policies
- Pension Accounts
When it comes to foreign assets, there are many assets that must be reported to the IRS.
Some common types of investments, include:
- Bank and Investment Accounts
- Stock Portfolios
- Pension Accounts
- Life Insurance Policies
- Ownership in a Foreign Business
- Foreign Partnerships
International Reporting Forms
There are many different IRS international information reporting forms that may be required to be filed by the taxpayer each year in order to report the foreign assets, accounts, and investments.
There are also many nuances involved in the filing of the different forms, and the forms are not mutually exclusive.
For example, one common misconception is that if a person files the FBAR, then they are not also required to file the form 8938 for the same asset — and vice versa — but this is incorrect.
Here is a brief list of some of the more common forms:
- FBAR (FinCEN Form 114): Foreign Bank and Financial Account Reporting
- Form 3520: Foreign Gift and Trust
- Form 3520-A: Foreign Trust
- Form 5471: Foreign Corporations
- Form 5472: US Corporation Owned by Foreign Person
- Form 8621: Passive Foreign Investment Companies (PFIC)
- Form 8840: Closer Connection Exception
- Form 8833: Tax Treaty Position
- Form 8865: Foreign Partnership
- Form 8938: FATCA (Foreign Account Tax Compliance Act)
Filing an Extension (4868 vs 7004)
Not all the international reporting forms are due on the same day.
Be cautious: when filing an extension for your tax return, some forms will go on automatic extension (FBAR), but others will require the filing of a separate extension Form (3520-A).
The two different extension form are the IRS Form 4868 and 7004.
Penalties for Offshore Noncompliance
The penalties for noncompliance with international information reporting can range extensively.
On one end of the spectrum, the IRS may issue a warning letter in lieu of penalties. At the other end of the spectrum, if the Internal Revenue Service determines you are willful, the penalties can range upwards to a 50% penalty on the maximum value of unreported accounts.
Disputing an International Tax & Reporting Penalty
The IRS cannot issue penalties if the taxpayer can prove that they have reasonable cause.
Reasonable cause comes in all shapes and sizes, and will vary depending on each individual taxpayer’s facts and circumstances – which is referred to as the “totality of the circumstance.”
Unfortunately, no two IRS agents are alike.
What might be considered reasonable cause to one agent may not suffice to another agent.
That is why the IRS Office of Appeals is available for Taxpayers to appeal rulings the taxpayer believes are unfair.
Complicating the matter further is that tax court is not readily available for taxpayers to dispute many of the different types of international penalties.
Rather, the taxpayer must wait until the U.S. government files a lawsuit against them in federal court or pay the penalty and then sue for refund — neither one of these options are very enticing to a taxpayer who believes they should not have even been penalized in the first place.
Reasonable Cause, Amnesty & Voluntary Disclosure
Sometimes, depending on the facts and circumstances, and especially when the taxpayer can prove non-willfulness the taxpayer can submit a reasonable cause statement package and/or delinquency procedures submission.
Alternatively, the taxpayer may submit a streamlined filing compliance procedure submission in order to reduce or eliminate offshore penalties.
If the taxpayer was willful — or technically cannot certify under penalty of perjury that they are non-willful — then the proper route is for the taxpayer to submit to the IRS voluntary disclosure program.
While OVDP ended back in September of 2018, the IRS also expanded the submission procedures for traditional voluntary disclosure to include both domestic and offshore scenarios.
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 of 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.
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