- 1 US Tax of Foreign Income Explained
- 2 US Citizen or US Person?
- 3 Reporting Foreign Income
- 4 Tax Treaties
- 5 Foreign Earned Income Exclusion (Form 2555)
- 6 Foreign Tax Credit (Form 1116)
- 7 International Information Reporting Requirements
- 8 FBAR Due Date and Extension
- 9 Form 8938 Due Date and Extension
- 10 Form 3520 Due Date and Extension
- 11 Form 3520-A Due Date and Extension
- 12 Form 5471 Due Date and Extension
- 13 Missed Prior Year’s Foreign Account Reporting Deadlines?
- 14 Late Filing Penalties May be Reduced or Avoided
- 15 Current Year vs Prior Year Non-Compliance
- 16 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 17 Need Help Finding an Experienced Offshore Tax Attorney?
- 18 Golding & Golding: About Our International Tax Law Firm
US Tax of Foreign Income Explained
US Tax of Foreign Income: The United States is one of the few countries worldwide that follows a worldwide income tax and reporting model. This means that US Persons are subject to tax on their worldwide income and must report their global assets to the IRS each year on a myriad of different international information reporting forms.
To be considered a US person (individual), there are three main categories:
Legal Permanent Resident
Foreign National who meets the Substantial Presence Test (SPT)
Below is a summary of the US taxation of foreign income tax and IRS reporting requirements.
US Citizen or US Person?
While the distinction between a US Person and a US Citizen may be important for immigration and other related purposes, from an IRS perspective it is pretty straightforward. A Legal Permanent Resident/Green Card Holder is subject to the same tax rules as a US Citizen. Both US Citizens and Legal Permanent Residents are taxed on their worldwide income regardless of where they reside and regardless of where the income was earned. There is also a third “catchall” category of individuals who are also required to pay tax on their worldwide income and report their foreign assets. It is referred to as the Substantial Presence Test, and it requires non-citizens and non-permanent residents to suffer the same tax fate as their citizen/resident counterparts — unless they can qualify for the Closer Connection Exception (8840 Form).
Reporting Foreign Income
When it comes to reporting foreign income in the US, there are various limitations, exceptions, and exclusions.
Here are a few tips to keep in mind:
The United States has entered into tax treaties with many countries. Common types of tax and reporting treaties include:
Income Tax Treaties
Estate Tax Treaties
For example, you may have a retirement plan in a country where there is no tax treaty, and therefore, the accrued but non-distributed income might be presently taxable, even if it is non-taxable (aka growing tax-free) in the country of origin (example CPFs in Singapore). Conversely, if there is a tax treaty in place as with the UK, then typically the non-distributed retirement funds will be tax-deferred until they are distributed and even the contributions may be tax deductible.
Foreign Earned Income Exclusion (Form 2555)
If you work overseas and meet the Tax Home test as well as either the Physical Presence Test or Bona-Fide Resident test, you may qualify for FEIE.
Foreign Tax Credit (Form 1116)
If you already pay taxes in a foreign country on the income you earned abroad, you may be able to apply those taxes you paid toward your US tax liability. This is referred to as the “Foreign Tax Credit.”
International Information Reporting Requirements
Each year, US taxpayers who have foreign investments, accounts, pension plans, and life insurance policies may be required to report the values of their overseas assets — along with any income generated from them — to the Internal Revenue Service. When a taxpayer misses an international information reporting return deadline, it may lead the IRS to issue fines and penalties. Oftentimes these international penalties can be avoided or abated through one of the offshore voluntary disclosure programs — or other IRS amnesty procedures. It is important to note that not all foreign account filing forms have the same deadlines and due dates — and the process for seeking an extension will vary depending on the type of form. Let’s look at six important facts about foreign account filing deadlines.
FBAR Due Date and Extension
The FBAR is used to report foreign bank and financial accounts to the US Government. The Form is due on April 15, but is currently on automatic extension. Therefore, if you did not file the FBAR (FinCEN Form 114) by April 15, you still have until October to file it. And, you do not have to file an extension form such as Form 4868 or 7004 to obtain the FBAR extension — because the extension is automatically granted.
Form 8938 Due Date and Extension
Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then the form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.
Form 3520 Due Date and Extension
Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.
Form 3520-A Due Date and Extension
Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). In order to extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.
Form 5471 Due Date and Extension
Form 5471 is used to report the ownership of certain foreign corporations. The filing date is the same as when a person’s tax return is due — and if the taxpayer files an extension for the underlying tax return, Form 5471 will go on extension as well. In recent years, Form 5471 has become infinitely more complex — so taxpayers should be cognizant of the different filing requirements and plan accordingly.
Missed Prior Year’s Foreign Account Reporting Deadlines?
If a taxpayer has not properly reported their foreign accounts, assets, or investments in prior years, they may want to wait before filing these documents for the current year. That is because Taxpayers should try to avoid making a quiet disclosure (which may result in significant fines and penalties). To do that, Taxpayers should submit to one of the offshore disclosure programs. Taxpayers may also want to consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in international tax matters before submitting to the IRS to get an understanding of the different requirements.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, 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.