Unreported Foreign Income
Unreported Foreign Income: A Taxpayer who is a U.S. Person has very specific tax and reporting requirements to the IRS. When a person discovers they have unreported income, accounts or assets from overseas, they get panicked — and oftentimes are misled as to what they should do. The internet is riddled with inaccurate information about how to disclose unreported foreign income. As long as a person is non-willful, they have various offshore tax amnesty procedures available to them to get into compliance that will limit or eliminate penalties. Otherwise, if a person is willful, they should consider submitting to the traditional voluntary disclosure program. 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.
We will summarize the basics of disclosing unreported income.
Disclosing Unreported Foreign Income
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 Unreported 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, if you held a foreign asset for more than 12 months before selling it, the assets should qualify as Long-Term Capital Gain treatment (LTCG) on a U.S. tax return.
Moreover, depending on which country you have your assets in, if you are receiving dividends then 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 still report the income on your tax return, and pay U.S. 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 foreign relatives) that surprise — you have been listed as an owner on various foreign accounts, apartments or other income generating assets abroad).
*This is common in India, or other Asian countries where parents open accounts using the child’s “Stamp” or “Chop.”
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 U.S. income), that may expand the number of options available to you for amnesty.
Common Questions about Overseas Income
How to Report Previously Undisclosed Income?
The IRS has developed various tax amnesty programs, collectively referred to as offshore voluntary disclosure.
The failure to be in compliance with unreported foreign income may lead to fines and penalties, such as FBAR penalties.
Which IRS Forms do I File?
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?
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)
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, dividends and capital gains — along with your U.S. income — to determine your progressive tax rate.
What is the Foreign Income Tax Rate?
You aggregate foreign income such as foreign interest along with you U.S. income to determine your progressive tax rate.
Your Goal is Avoid Offshore Penalties
Commonly issued penalties may include reporting of foreign income and accounts, including:
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.