- 1 U.S. Citizens & Legal Residents Abroad Still File IRS Tax Returns
- 2 What if I Reside Overseas?
- 3 Expat Tax Filing Example
- 4 Why is this Important?
- 5 Foreign Accounts, Assets & Investments
- 6 IRS International Tax Form Guide
- 7 Common International Tax Forms You May Have Missed
- 8 FBAR (FinCEN 114)
- 9 Form 8938
- 10 Form 3520
- 11 Form 5471
- 12 Form 8621
- 13 What if I am Out of FBAR Compliance?
- 14 Golding & Golding, Board Certified in Tax Law
U.S. Citizens & Legal Residents Abroad Still File IRS Tax Returns
One common misconception we come across often is when U.S. Expats who reside overseas do not believe they still have to file US tax returns, solely because they reside out of the United States.
Unfortunately, even U.S. Expats who longer reside in, or even visit the United States are still required to file tax returns — if they meet the threshold requirements.
U.S. Citizens & Legal Residents Abroad Still File IRS Tax Returns
When a person is considered a U.S. person, such as a U.S. citizen or Legal Permanent Resident/Green Card Holder the United States taxes the individual on the worldwide income.
What that means, is that it does not matter if the income was generated from an employer in the United States or outside of the United States — if the individual is considered a U.S.person, then their income is still subject to U.S. tax.
What if I Reside Overseas?
If you are a US expat that resides outside of the United States, there are various ways to minimize your tax. The two most common ways is by claiming the foreign earned income exclusion (FEIE, Form 2555), and/or the foreign tax credit (FTC, Forms 1116 or 1118).
But, just because you may qualify for the exclusion or have pay tax overseas does not mean you do not have to file a US return, it just means you have to file the return and either claim exclusion, the credit, or a hybrid of both
Expat Tax Filing Example
David is a U.S. Expat that resides in Brazil. He earned the $95,000 USD.
As a U.S. person, filing single he may have a $20,000-$30,000 tax liability (depending on whether he has any deductions).
While David is aware that he qualifies for the exclusion, the IRS does not know that David qualifies for the exclusion. Therefore, since the IRS is not yet aware, the IRS may just believe that David suddenly stopped filing his returns.
Why is this Important?
Because in recent years, the Internal Revenue Service has made international tax compliance a key enforcement priority. David’s failure to be in IRS tax compliance can result in significant issues, such as:
- Tax levy
- IRS Passport Revocation
- IRS Special Agent Investigation
Foreign Accounts, Assets & Investments
Even if a person does not have a tax return filing requirement, because they’re below the filing threshold, they may also have a reporting requirement.
There are various forms a U.S. Expat may have to file in order to get into compliance each year involving the disclosure of foreign accounts, assets, investments, and income.
*It is important to note though, that for the time being, the IRS has a special program designed for expats that meet the foreign resident requirement in accordance with the Streamline Foreign Offshore Procedures, and may qualify for a complete penalty waiver.
IRS International Tax Form Guide
The following is a summary of five (5) common international tax forms. If these forms are not properly filed (and have not been properly filed in the past), it may lead to significant fines and penalties — unless you submit to one of the approved IRS offshore disclosure programs:
Common International Tax Forms You May Have Missed
The following is a list of the more common forms you may have missed:
FBAR (FinCEN 114)
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
This form is used to report “Specified Foreign Financial Assets.”
There are four main thresholds for individuals is as follows:.
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
What if I am Out of FBAR Compliance?
If you are out of FBAR compliance, the penalties can be severe. Therefore, you may consider entering the IRS offshore voluntary disclosure/tax amnesty, before it is too late.
Golding & Golding, Board Certified in Tax Law
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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. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.