For Entrepreneurs with Overseas Entities or Foreign Accounts

How Does US Tax Entrepreneurs on Overseas Income and Assets?

For Entrepreneurs with Overseas Entities or Foreign Bank Accounts

Oftentimes, when US Persons hear the term “offshore” or “foreign reporting,” they imagine the IRS is only referring to monies stashed away in typical haven countries or passive income (and not earned income) — but unfortunately neither of that is true. In the past 10-years, the Internal Revenue Service and DOJ have significantly increased enforcement of the international information reporting requirements, such as reporting foreign income, assets, accounts, investments, gifts and more.

US Taxes Entrepreneurs on Worldwide Income

The US tax system is different than most other countries and that even if you do not reside overseas — but are earning income from overseas — it is reportable to the US government even if it is not repatriated (most of the time). And, taxes on worldwide income is not limited to just US Citizens. Rather, the United States taxes US Persons on their worldwide income. It is important to note that the definition of the term US Person is not limited to US Citizens — it also includes Lawful Permanent Residents and non-permanent resident to meet the Substantial Presence Test. 

Foreign Bank Accounts and Assets

One of the biggest enforcement priorities for the Internal Revenue Service is the international information reporting requirements. US Person Entrepreneurs who have foreign accounts and assets may have significant reporting requirements in addition to their US tax return, including reporting their foreign assets and accounts on:

• • • Form 3520

    • Form 3520-A

    • Form 5471

    • Form 5472

    • Form 8621

    • Form 8865

    • Form 8938

The failure to timely file these forms may result in significant fines and penalties — although oftentimes the penalties can be minimized and eliminated through the offshore amnesty programs.

Foreign Investment Fund Tax & Reporting

Investment funds also require disclosure to the US government. Depending on the type of fund, the level of reporting can be complex — especially when there are investment funds that qualify as PFIC.

Entrepreneurs with Accrued vs Distributed Income

In general, accrued passive income that an Entrepreneur earns on foreign investments is taxable in the United States when it is accrued. For entrepreneurs who formed corporations and other entities outside United States — they too may have to report their ratable share to the US government when the income qualifies as Subpart F.

Foreign Tax Credits: Net vs Gross

When an entrepreneur turns money overseas but has already paid taxes in a foreign country, they may qualify for foreign tax credits — which can be used to reduce and sometimes even eliminate any US taxes due on the income. The foreign tax credits or not always a dollar-for-dollar credit — and there are other limitations and exclusions to consider.

GILTI Headache for Entrepreneurs

GILTI refers to the Global Intangible Low-Taxed Income rules came into effect in accordance with TCJA (tax cuts and jobs). GILTI is very complicated — but form a baseline perspective — income that is earned in an overseas CFC (and is not Subpart F) may still be taxable in the United States even before it is repatriated. There are certain exceptions and limitations — and corporations (and some individuals who would benefit from an 962 election) may be able to eliminate GILTI Tax.

Subpart F

There are various different categories of subpart F income, but the most common type of Subpart F Income is passive income. When a Controlled Foreign Corporation (CFC) — foreign corporations owned primarily by US persons — generate certain passive income in a year that they meet the E&P threshold, it may result in the US person having to pay tax on their proportionate share of income — even though the income was not distributed to the taxpayer.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.