US Taxpayers Living Abroad Report Income & Foreign Accounts

US Taxpayers Living Abroad Report Income & Foreign Accounts

Does the United States Tax Worldwide Income  

The United States is one of the only countries across the globe that follows a citizen-based taxation model. That means that unlike other countries that tax individuals on their worldwide income only when that person qualifies as a resident of that state –– the United States taxes individuals on their worldwide income simply because they are a US person. In fact, citizen-based taxation is actually a misnomer because in reality, a person can be a US citizen or resident of the United States and still be considered to have the United States as their tax home. Let’s take a look at three examples involving the U.S. taxation of individuals.

US Citizen Residing Overseas

Here is a very common example of how US Citizens get taxed on overseas income: Jennifer is a US citizen who resides abroad. She earns all of her income from sources outside of the United States and she pays foreign taxes on the income she earns overseas. The fact that Jennifer resides outside of the United States and has not earned any US tourist income does not eliminate her US tax requirement. Even though Jennifer resides overseas, she is still required to file a US tax return to report her global income — along with disclosing her foreign assets on various international information reporting forms such as FBAR and FATCA.

Lawful Permanent Resident Abroad

Michael is a Lawful Permanent Resident who lives outside of the United States. Similar to Jennifer, Michael earns all of his money from overseas sources as well. From a baseline perspective, Michael is considered a US person and is therefore required to report his foreign income on a US tax return as well as disclose his international assets and accounts to the US government — similar to a US Citizen. Michael may be able to make a treaty election to be treated as a foreign resident instead of a US resident — and therefore is only taxed on his US-sourced income similar to a non-resident alien. In order to qualify, the taxpayer must be in a treaty country and meet the requirements necessary to prove significant contacts with the foreign country –– if the taxpayer is already a long-term lawful permanent resident they have to be careful of accidentally expatriating and possibly becoming subject to exit tax if they are considered a covered expatriate with significant assets or income.

Non-Permanent Resident & Substantial Presence

In this example, Michelle is a non-resident alien who is neither a permanent resident nor a US citizen of the United States. Her foreign company transferred her to the United States on an L1 visa. She remains in the United States for the majority of each year — other than traveling back to see her relatives a few weeks out of the year. Since Michelle meets the substantial presence test, despite the fact that she is neither a US citizen nor a lawful permanent resident, she is also required to report her global income and assets to the US government.

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 that 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 of the Streamlined Procedures. 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

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

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