Income from a Foreign Bank without 1099
For US persons who earn foreign income such as overseas bank interest and investment dividends/capital gains, the tax and reporting implications for US tax law can be unnecessarily onerous. That is because the United States follows a worldwide income tax model. That means, that people who are considered US persons and generate income both in the United States and outside of the United States — are required to report both sources of income on their US tax returns. While it is common for Foreign Financial Institutions (FFI) in the United States to issue Form-1099 to reflect the amount of income generated for customers — the same does not hold true for foreign institutions that are not required to issue Form-1099, especially if they are not subject to US tax law. The question then becomes is if the income that is earned from an FFI that did not issue a Form-1099, is the income still taxable in the US?
Form 1099 and Income Tax are Not the Same
Let’s take a typical example: Jennifer is a US person who has $500,000 invested in bank accounts abroad. In total, the accounts generate $15,000 of foreign passive income (when it is exchanged into US dollars). In fact, the money was never withdrawn from the foreign banks and the FFIs never issued a Form-1099, since these foreign country banks are located in countries in which these types of passive income are not taxable.
Undistributed Income is Taxable
Even when foreign income is not distributed or withdrawn from the account, it is still taxable to the US Person. There are some exceptions and limitations to these — such as whether it is PFIC income and/or whether or not a treaty excludes a certain type of income from taxation — but the general proposition is that the income is still taxable.
What if No Form 1099 was Issued?
A Form 1099 is solely used by certain financial institutions to provide taxpayers with notice as to how much income the bank or other financial institution claims they paid to the US person. Whether or not a US person receives a Form-1099 is not dispositive as to whether or not the income generated is still taxable. In other words, the income is still taxable even if no Form 1099 is issued. In fact, unlike the W-2, Form-1099 is not usually filed with your tax return. If you missed filing in prior years, you may want to speak with a Board-Certified Tax Law Specialist to assess your options for offshore disclosure amnesty.
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