Offshore Disclosure when you Received a Refund on your Foreign Taxes Paid?
- 0.1 How a Foreign Tax Credit works
- 0.2 How a Foreign Tax Credit Doesn’t Work
- 0.3 How does Foreign Income & Foreign Account Reporting Work?
- 0.4 Who Has to Report?
- 1 The Basics
- 1.1 Foreign Income
- 1.2 Foreign Accounts
- 1.3 Fines & Penalties
- 1.4 Customs Holds and Passport Revocation
- 1.5 Getting Into Compliance
If a person is subject to US tax, then they are subject to US tax on their worldwide income. That means if a person is earning income in a foreign country, they have to report that income on their US tax income. But, it does not mean that they will have to re-pay the same tax twice.
How a Foreign Tax Credit works
David resides in the United States but earns interest income from foreign accounts located in Portugal. Before David receives his monthly interest income, the bank withholds a certain percentage of the income for taxes in Portugal.
Since the foreign tax rate exceeds the U.S. Tax Rate, when it is time for David to file his US tax return and report the Portuguese interest income, he will also report the foreign taxes that were already withheld in Portugal – so they will be no tax liability for David in the United States – using foreign tax credit form 1116.
How a Foreign Tax Credit Doesn’t Work
In many countries, even though the bank or foreign financial institution may withhold a portion of the earnings for tax, when it comes time to file a tax return, the individual may not have sufficient income necessary to file a tax return. For example, Vikram is originally from India and still has several resident accounts in India. As such, the bank withholds certain money that Vikram earns as interest, before the money is distributed to him.
When it is time to file his tax return in India, Vikram does not need to file a tax return because he is below the threshold requirement necessary to have to file a tax return. As such, the Indian government refunds him any taxes that were withheld from the bank. In the end, Vikram did not pay any foreign tax (Since it was all credited back to him). In this particular circumstance, Vikram may not claim the foreign tax credit in the United States.
Why? Because even though Vikram made payment for foreign tax, he also received a refund from the foreign country. Therefore, in the eyes of the United States he did not actually pay any tax; in other words, he cannot obtain a US foreign tax credit on foreign taxes that were paid, but refunded.
**If the money was refunded to a relative or other individual on your behalf, then generally you cannot claim the credit either.
How does Foreign Income & Foreign Account Reporting Work?
At Golding & Golding, our law practice is limited to offshore voluntary disclosure. We handle all aspects of FATCA, FBAR, OVDP, Streamlined and related issues. We understand how overwhelming and stressful this process can be, and therefore have prepared a basic introduction to international tax reporting and FATCA compliance, which is been reproduced below for your benefit.
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
Please do not worry. We can assist you as we have assisted hundreds of clients in over 40 countries disclose upwards of $40 million in a single disclosure.
We are available seven days a week and provide flat-fee and full-service representation to our clients around the world.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
We provide a reduced fee telephone consultation to all potential clients (excluding CPAs, Lawyers, and/or other Tax Professionals) so that we can answer your questions. All calls are strictly confidential and the information is covered under the attorney-client privilege (even if you decide not to retain our firm).
Call now; let us help you.
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.)
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