IRS Penalties for Unreported Foreign Income
Unreported Foreign Income: U.S Taxpayers who have unreported income from overseas are oftentimes misled about what to do. The internet is riddle with inaccurate information. As long as a person is non-willful, they have various procedures available to them to get into compliance.
When a U.S. Person has both unreported foreign income and assets or accounts, then voluntary disclosure or tax amnesty is great option to resolve the issues.
Since the U.S. government has take an aggressive approach on matters involving foreign accounts compliance, time is (usually) of the essence to get the matter resolved.
What Steps Should Taxpayers Take?
First, take a deep breath, and relax — you will get through this. Next, the Taxpayer should assess their foreign income sources and categories of income to determine what overseas earnings they have, that they have not reported.
In general, the U.S. follows a worldwide income model. Therefore, the U.S. taxes filers on their worldwide income. This is true of all U.S. Persons, whether they reside in the U.S. or overseas — and whether the income is U.S. or foreign sourced.
What Type of Foreign Income do You have?
Not all foreign income is treated the same. Typically, foreign capital gains is going to receive the same long-term or short-term treatment under US tax return as if it was a US asset. For example, even though in India, Long-Term Capital Gain (LTCG) is 36 months, in the United States it should qualify as LTCG as long as it was held for one-year.
Moreover, depending on which country you have your assets in, if you are receiving dividends, you may be able to obtain qualified dividends (this will often depend on whether there is a treaty and/or if the stock is traded on an acceptable foreign market). If you are receiving foreign interest income (even if it is in a country such as Hong Kong and Singapore, which does not tax that category of passive income) you are still going to have to report that and pay US tax at your ordinary tax rate.
How Much Foreign Income Do You Have?
If you only have a few dollars of unreported income, your compliance method may be different than if you have tens or hundreds of thousands of dollars of unreported income. In addition, since the total amount of income you have is aggregated with your Domestic or U.S. based income (in order to determine your gross income), it is important to have a firm understanding of how much foreign income you have not reported when you first begin your research
Did You Pay Foreign Taxes on the Income?
If you already paid foreign taxes on your foreign income, either by filing a foreign tax return or having money withheld from your account abroad, then you may be entitled to a foreign tax credit in most circumstances. The purpose of the Foreign Tax Credit is to avoid or limit any double-tax on foreign income you earned abroad but already paid on, and/or have had tax withheld by the foreign government.
Unfortunately, the Foreign Tax Credit is not always a dollar-for-dollar credit. There is an equation that is applied by the IRS, and if the foreign income is going to increase your U.S. tax bracket, then depending on the amount of income and the tax rate you paid overseas, it may impact whether you will still owe tax to the IRS on your U.S. tax return — even after applying the foreign tax credit.
When Did you First Learn About the Foreign Income?
Have you known about the foreign income for many years or were you only recently clued in (either on your own, or by one of your parents or other relatives that told you that you have been listed on some of the foreign accounts, apartments or other income generating assets abroad). At Golding & Golding, IRS Offshore Voluntary Disclosure of foreign income, assets, and investments is the only area of law we practice – even though your situation may seem unique, chances are we have seen something just like, it or similar to it in our many years of Law and Tax practice
Have You Been Filing U.S. Tax Returns?
If you have been consistently filing US tax returns to report your U.S. source income (presuming you have any), that will put you in a better position and increase your offshore amnesty options when it is time for you to submit an IRS Offshore Disclosure package to the IRS, disclosing your foreign money. The IRS has developed various offshore amnesty programs to assist individuals with getting into compliance safely regarding their unreported foreign income.
Common Questions about Overseas Income
How to Report Previously Undisclosed Income
The failure to be in compliance with unreported foreign income may lead to fines and penalties, such as FBAR penalties. But, the IRS has developed various tax amnesty programs, collectively referred to as voluntary disclosure.
Common questions about unreported foreign income, include:
How to Report Foreign Income to the IRS?
A person reports foreign income by including it on their tax return. This generally includes the Forms 1040: Schedule B; Schedule C; Schedule E; Form 5471, and other forms.
Is there U.S. Taxes on Foreign Income?
Yes. A U.S. Person (U.S. Citizen, Legal Permanent Resident or Foreign National who met the Substantial Presence Test has to pay taxes on foreign income (worldwide income)
What is IRS Foreign Income?
IRS Foreign Income is a way of describing the fact that the IRS taxes U.S. Person on Foreign Income.
Do U.S. Citizens have to pay tax on Foreign Income?
Yes. Unless an exception, exclusion or limitation applies, a U.S. Citizen pays tax on foreign income.
How is Foreign Income Taxed?
It is generally taxed the same way that U.S. Income is taxed. In other words, you aggregate foreign income such as foreign interest along with you U.S. income to determine your progressive tax rate.
What is the Foreign Income Tax Rate?
It will vary, but it is generally taxed the same way that U.S. Income is taxed. In other words, you aggregate foreign income such as foreign interest along with you U.S. income to determine your progressive tax rate.
How to Report Foreign Interest on 1040?
Foreign interest is reported annually on a Schedule B and then it flows through to Line 8 of the 1040.
Goal is to Avoid Offshore Penalties
Commonly issued penalties may include reporting of foreign income and accounts, including:
Under the current IRS regime, the state of the law right now is for the IRS to focus its efforts on offshore compliance. And, because there are so many different International Information Reporting Tax Forms a person may be required to file, that depending on the type of assets and number of missed forms, the IRS penalties can really stack up.
Easy Steps to IRS Offshore Compliance
If you have recently discovered that you are out of IRS compliance for failing to properly including foreign income on your tax return, here are 10 steps to getting into compliance quickly, safely and effectively.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.