If you are a US entrepreneur with foreign accounts or foreign income located in a foreign country, it is important that you stay in IRS tax compliance from the start.
U.S. Entrepreneurs & International Tax
If you remain in tax compliance, then you can spend less time worrying about IRS offshore-related issues and more time focusing on building and expanding your business.
To that end, with the globalization of the US economy, even though you may not believe at the current moment that you will have foreign income or foreign accounts, but you never know where your life will take you — especially when you’re an entrepreneur.
Therefore, here are a few basic tips to keep in mind when expanding overseas:
If you are a US person, which typically means you are a US citizen, legal permanent resident, or foreign national who meets the substantial presence test, then you have to pay tax to the IRS on your worldwide income. It does not matter if the money was earned overseas, it does not matter if the company did not issue you a 1099 and it does not matter if the income is tax-free abroad.
It is a very straightforward, bright line test: if you earned income anywhere in the world and you are considered a US person, then you have to report the income on your tax return.
Important Foreign Account & Asset Definitions
Outside of the United States. No same-country exception for reporting.
Account includes much more than just “Bank Accounts.” See below for an expanded summary.
Means the filing of the FBAR form, online on the FinCEN website.
Report of Foreign Bank and Financial Account Form.
TD stands for Treasury Department and is another way to identify the form.
FinCEN Form 114
FinCEN is a financial crimes enforcement network. FinCEN created the form initially back in the 1970s, but now the IRS enforces penalties.
The Bank Secrecy Act
If you begin to operate in foreign countries, sometimes it’s optimal to open local bank accounts that have local currency available to you. Therefore, when opening a foreign bank account, the most important thing to keep in mind is the US FBAR reporting requirement.
We have written countless articles on this issue and by going to our international tax library and just searching “FBAR,” you probably come across more articles than you ever could imagine any firm could author. The most important fact to keep in mind is the following: if on any day of the year, you have more than $10,000 in annual aggregate total in your foreign accounts combined, then you have to report the FBAR.
The biggest mistake we see are individuals believing that they do not have to file the form because they have less than $10,000 in each account — this is incorrect. It is an annual aggregate total of more than $10,000.
It is important to keep note of the exchange rates used in each country each year (and Department of Treasury publishes their own exchange rates which are very similar but not always identical).
In addition to foreign accounts, if you decide to invest in foreign assets, you may also have a reporting requirement. A few important facts to keep in mind is that oftentimes a foreign account will also be reportable as a foreign asset. Moreover, certain foreign assets have to be reported (stocks or securities) and other foreign assets do not need to be reported (foreign real estate, unless its owned by an entity).
The threshold requirements for having to report specified foreign assets (Form 8938) are based on whether you are filing as an individual or jointly, and whether you’re filing as a United States citizen or as a foreign resident
The United States has entered into numerous tax treaties with upwards of 60 different countries. While many of the tax treaties have common verbiage, oftentimes they are different. Therefore, it is important to keep track of the different treaties for each country you are engaging business with.
Finally, the fifth important fact to keep in mind is that depending on where your residence turns out to be and whether you’re paying Social Security tax in a foreign country, you may qualify to exempt the Social Security on your US tax return under a totalization agreement.
The United States does not have totalization agreements with each country so is important to understand whether the country you are doing business with has this agreement (for example, while the United States and Australia have a totalization agreement, the United States and New Zealand do not).
This could have a major tax impact for these businesses, especially for dual citizens or a foreign citizen of one of these countries who is a green card holder in the United States.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.