US Taxation of Brazil Income and Asset Reporting
The United States has entered into several tax treaties with different countries across the globe — unfortunately, Brazil is not one of them. While many US taxpayers are originally from Brazil and/or still maintain offshore accounts, assets & investments, and/or generate income from Brazil — since there is no tax treaty between the United States and Brazil, it can make it unnecessarily difficult when it comes to analyzing how various income generated from Brazil is taxed in the United States. When a tax treaty is in place, it helps limit and minimize the taxation of certain income between the two countries. Some treaties reduce tax rates, eliminate tax on certain types of income such as Business Income, Capital Gains, and real estate, and/or restrict how pension income can be taxed. When there is no tax treaty in place, the US government generally relies on basic US tax law principles in evaluating how foreign income should be taxed. Let’s review the U.S. taxation of Brazil income and IRS Offshore Disclosure Rules.
Brazil/US Income Tax Treaty
Since there is no Tax Treaty between the United States and Brazil, the default position is that a taxpayer who is a US person, such as a U.S. citizen, Legal Permanent Resident, or Foreign National who meets the Substantial Presence Test, is taxed worldwide. With Brazil, this would also include income that is being generated in Brazil and may be considered tax-free under the tax rules of Brazil.
Worldwide Income
The idea behind the Worldwide Income tax model is the concept that a person is subject to tax on the income of the country they are a citizen of, whether or not they reside in the country — and whether or not the income they generate is sourced in that country. In other words, a taxpayer is forced to pay tax simply for the benefit of being a citizen of that country. The United States is one of only two countries that practice this type of tax system. Take for example a US Taxpayer who lives abroad. If the US Citizen abroad resides in a foreign country and earns all of their money from foreign sources, is it really fair for the United States to have the power to tax that individual — upwards of 37% — simply because they have US Citizen status? Making matters worse, even though it is referred to as Citizenship-based taxation, in fact, it refers to US persons and not just US citizens – which is why foreign nationals who are considered US residents can get swept up into the definition of CBT.
But if a taxpayer has paid taxes overseas on foreign income, then they can usually claim a foreign tax credit. Likewise, if the taxpayer resides overseas long enough to meet either the bona fide residence test or physical presence test, then they should qualify for the foreign earned income exclusion –– which allows them to exclude upwards of 108,000 of annual income from US tax liability — along with a housing exclusion –– and married couples can each claim FEIE.
International Tax Forms Reporting
Each year, US taxpayers who have foreign investments, accounts, pension plans, and life insurance policies may be required to report the values of their overseas assets — along with any income generated from them — to the Internal Revenue Service. When a taxpayer misses an international information reporting return deadline, it may lead the IRS to issue fines and penalties. Oftentimes these international penalties can be avoided or abated through one of the offshore voluntary disclosure programs — or other IRS amnesty procedures. It is important to note that not all foreign account filing forms have the same deadlines and due dates — and the process for seeking an extension will vary depending on the type of form. Let’s look at six important facts about foreign account filing deadlines.
FBAR Due Date and Extension
The FBAR is used to report foreign bank and financial accounts to the U.S. government. The Form is due on April 15, but is currently on automatic extension. Therefore, if you did not file the FBAR (FinCEN Form 114) by April 15, you still have until October to file it. And, you do not have to file an extension form such as Form 4868 or 7004 to obtain the FBAR extension — because the extension is automatically granted.
Form 8938 Due Date and Extension
Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then Form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.
Form 3520 Due Date and Extension
Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.
Form 3520-A Due Date and Extension
Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). In order to extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.
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.
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.
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.