INTERNATIONAL TAX COMPLIANCE
Critical details YOU need to know to protect you and your company in the complex world of U.S. international tax reporting
It’s a trap! When complying with U.S. tax law, there are many traps for the unwary. Those traps can be really expensive.
The U.S. government and the Internal Revenue Service aren’t going to send you notices or give you fair warning.
YOU are responsible for knowing whether you are
properly following the law or not
If you miss it? Again, we are back to that’s the “expensive” part.
WHO ARE REQUIRED TO FOLLOW THE U.S. LAWS
The first part of the equation is asking who is required to follow these U.S. laws.
The short answer is “U.S. Persons.” But wait. We aren’t just talking about human beings when we use the term U.S. Persons. It is a much broader definition including:
• U.S. Citizen
• U.S. Resident Alien Green Card Holder
• U.S. Resident Alien (substantial presence test)
• U.S. Corporations
• U.S. Partnerships
• U.S. Estates
• U.S. Trusts
• U.S. Associations
WHY DO I CARE
Why is this important? Why does it matter?
U.S. Persons are subject to U.S. federal income taxes
on their WORLDWIDE INCOME
No matter where you are living or working or operating, if you are a U.S. Person, then your tax return is “going global”.
Consider some of the types of worldwide income that are included in your U.S. return:
• Non-U.S. salaries
• Income from foreign partnerships
• Self-employment income earned overseas
• Capital gains from the sale of stocks & other securities held abroad
• Gains from foreign real estate
• Interest & dividends from foreign companies and foreign mutual funds
HOW DOES THE IRS KNOW
If you are thinking that the IRS doesn’t know about your foreign activities, you should reconsider.
Since 2011, banks and other foreign financial institutions and many foreign governments have been participating in a U.S tax information program called FATCA.
FATCA stands for the Foreign Account Tax Compliance Act. It has grown into a global information sharing agreement originally designed to find all those U.S. Persons with foreign investments, accounts and business activities. The IRS wants to make sure global income is being reported and taxed.
With the December 22, 2017 passage of the latest U.S. tax reform act, foreign earnings of certain corporations may no longer be taxed in the U.S.
That doesn’t mean that FATCA and its onerous reporting requirements are going away. Nor does it relieve the burden for individual taxpayers.
FATCA – THE CASH COW
This effort has paid off handsomely for the IRS through programs such as the Overseas Voluntary Disclosure Program (OVDP) and previously unreported income.
Many people have come forward voluntarily paying back taxes and penalties in exchange for avoiding criminal prosecution if caught.
DO I NEED TO WORRY
It all depends on whether you have foreign connections in some form or another. These connections take many different forms. Here are some typical examples where you own:
• Foreign Bank Account (ownership or signature authority)
• Foreign retirement account or pension (from having worked overseas)
Canadian RRSP or RRIF retirement accounts
• Bitcoin or other crypto currencies
• Life insurance from a foreign insurance company
• Offshore annuities
• 10% or more ownership in a foreign partnership
• Ownership in a foreign corporation or LLC
• Beneficiary or trustee of a foreign trust
• Beneficiary of a foreign inheritance
• Foreign rental properties or other real estate whether owned personally or through a foreign corporation you set up to hold ownership
• Foreign mutual fund investments
• Transferring money to a foreign corporation where you hold an ownership interest
TAX FORMS & RELATED PENALTIES
Here is a brief outline of some of the U.S. tax forms you’ll need to consider. We’ve listed below some of them with some of the penalties that may be assessed for not filing them on time:
• Foreign Bank Account [FBAR] Form 114 - $10,000
• Form 5471 – 10% or more ownership in a Foreign Corporation - $10,000 per form per year
• Form 5472 – Foreign ownership of US Corporation - $10,000 per form per year
• Form 8865 – Foreign Partnership - $10,000 each
• Form 8858 – Foreign Disregarded Entities - $10,000 each
• Form 8621 – Shareholder of a Passive Foreign Investment Company – civil accuracy and fraud penalties on unpaid tax.
• Form 926 – Transferor of Property to a foreign corporation – 10% of FMV of property with a $100,000 maximum penalty.
• Form 8832 – Entity classification election
• Form 3520 – Foreign Trusts, Gifts and Inheritances
• Form 3520-A – Foreign Trustee reporting requirement
• Form 8938 – Report of Foreign Financial Assets
This article is a brief summary of some of the potential filing requirements you may be unaware of.
If you have any questions or doubts, we strongly urge you to obtain advice and counsel. Don’t ignore a potentially expensive issue. Address it right away. The IRS is much easier to deal with if you come forward asking forgiveness than if they come to you asking why you didn’t comply.