Repatriating Foreign Investment Income to US
When an individual has money overseas, the process of relocating that money to the United States is referred to as repatriation. In general, the United States taxes US persons on their worldwide income. That means that just because a person has money overseas that generated foreign income which was not repatriated to the US — does not mean it escapes US tax. This is especially true in situations in which a US person has income generated from a CFC (Controlled Foreign Corporation). Taxpayers who have money overseas want to be aware of the different tax and reporting requirements for that foreign income — noting, that whether or not the money is technically repatriated back to the United States or repatriated to the U.S, it is still usually taxable. Let’s take a brief look at seven key facts about the repatriation of foreign money for US persons.
Worldwide Income & Citizenship-Based Taxation
The concept behind worldwide income taxation is that the United States taxes US persons based on their US Person status and not simply by their country of residence. Therefore, if you are a US person and you reside in the United States — even if all your income is sourced from overseas and is not repatriated to the United States — you are still taxed on that foreign income. If the taxpayer has foreign tax credits, they may apply the to try to reduce or eliminate the US tax liability on that income. Likewise, the taxpayer may also qualify for the Foreign Earned Income Exclusion (FEIE) to eliminate certain foreign-earned income from US taxation. But, from a baseline perspective, the income is taxable.
FATCA and FBAR Reporting
In addition to the tax implications of foreign earnings, there is the other issue of having to report the information to the US government. There are various international information reporting forms that a US person may have to file to report their foreign assets, accounts, investments, and income — but the two most common are the FBAR (FinCEN Form 114) and FATCA (Form 8938). The failure to timely report these assets may lead to significant fines and penalties although there are IRS amnesty programs available to taxpayers to assist with compliance — and reduce or eliminate penalties.
PFIC refers to Passive Foreign Investment Companies. Oftentimes, the PFIC tax rules come into focus when a person invested in overseas mutual funds or other pooled funds such as ETFs. Tax rules involving PFIC are very complicated — and the tax rates on excess distributions double or even triple their US version counterparts. Taxpayers may want to plan around PFIC rules if they intend on becoming a US person and have invested in these types of assets (whether or not the income is repatriated to the United States or not).
CFC refers to Controlled Foreign Corporations. Even before the introduction of the Tax Cuts and Jobs Act (TCJA) controlled foreign corporation taxation was always very complicated. But, with the introduction of the TCJA and especially the introduction of the Repatriation Tax Act (Section 965) and GILTI (Global Intangible Low-Taxed Income), the tax rules involving CFC became infinitely more complicated. Even if the money is not repatriated back to the United States, if it qualifies as certain types of income it is still taxable. In addition, there is a one-time repatriation tax for certain foreign money in Controlled Foreign Corporations that has not been taxed; this includes money that was not repatriated.
Foreign Trust (UNI vs DNI)
When a person has ownership of a foreign trust such as a grantor trust (or partial ownership of a Non-Grantor Trust), there are US tax implications. Whether or not the income is repatriated to the United States, certain earnings are still taxable if they are owned within a foreign trust. Likewise, if portions of the income are not distributed and the DNI turns into UNI (throwback tax rule) — it can change the character of the income as well.
Wire Transfer Audits
Once a person is ready to repatriate their money back to the United States, it is to keep in mind that the US Government has been aggressively going after Taxpayers who are non-compliant. The number of wire transfer audits has significantly increased in the past few years – so taxpayers considering transferring large sums of money from overseas to the United States, will want to make sure they are in compliance before doing so.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the pension 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 that specializes exclusively in these types of offshore disclosure matters.
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.