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Main Worldwide Income Reporting Myths | International Tax Attorney St Paul

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In a previous article, I discussed the worldwide income reporting requirement and I mentioned that I would discuss the traps or false myths associated with this requirement in a future article. In this essay, I will keep my promise and discuss the main worldwide income reporting myths.

Worldwide Income Reporting Myths: the Source of Myths

I would like to begin by reminding the readers about what the worldwide income reporting rule requires. The worldwide income reporting requirement states that all US tax residents are obligated to disclose all of their US-source income and foreign-source income on their US tax returns.

This rule seems clear and straightforward. Unfortunately, it does not coincide with the income reporting requirements of many foreign tax systems. It is precisely this tension between the US tax system and tax systems of other countries that gives rise to numerous false myths which eventually lead to the US income tax noncompliance. Let’s go over the four most common myths.

Worldwide Income Reporting Myths: Local Taxation

Many US taxpayers incorrectly believe that their foreign-source income does not need to be disclosed in the United States because it is taxed in the local jurisdiction. The logic behind this myth is simple – otherwise, the income would be subject to double taxation. There is a variation on this myth which relies on various tax treaties between the United States and foreign countries on the prevention of double-taxation.

The “local taxation” myth is completely false. US tax law requires US tax residents to disclose their foreign-source income even if it is subject to foreign taxation or foreign tax withholding. These taxpayers forget that they may be able to use the foreign tax credit to remedy the effect of the double-taxation.

Where the foreign tax credit is unavailable or subject to certain limitations, the danger of double taxation indeed exists. This is why you need to consult an international tax attorney to properly structure your transactions in order to avoid the effect of double-taxation. In any case, the danger of double taxation does not alter the worldwide income reporting requirement – you still need to disclose your foreign-source income even if it is taxed locally.

The tax-treaty variation on the local taxation myth is generally false, but not always. There are indeed tax treaties that exempt certain types of income from US taxation; the US-France tax treaty is especially unusual in this aspect. These exceptions are highly limited and usually apply only to certain foreign pensions.

Generally, however, tax treaties would not prevent foreign income from being reportable in the United States. In other words, one should not turn an exception into a general rule; the existence of a tax treaty would not generally modify the worldwide income reporting requirement.

Worldwide Income Reporting Myths: Territorial Taxation

Millions of US taxpayers were born overseas and their understanding of taxation was often formed through their exposure to much more territorial systems of taxation that exist in many foreign countries. These taxpayers often believe that they should report their income only in the jurisdictions where the income was earned or generated. In other words, the followers of this myth assert that US-source income should be disclosed on US tax returns and foreign-source income on foreign tax returns.

This myth is false. US tax system is unique in many aspects; its invasive worldwide reach stands in sharp contrast to the territorial or mixed-territorial models of taxation that exist in other countries. Hence, you cannot apply your prior experiences with a foreign system of taxation to the US tax system. With respect to individuals, US tax laws continue to mandate worldwide income reporting irrespective of how other countries organize their tax systems.

Worldwide Income Reporting Myths: De Minimis Exception

The third myth has an unclear origin; most likely, it comes from human nature that tends to disregard insignificant amounts. The followers of this myth believe that small amounts of foreign source income do not need to be disclosed in the United States, because there is a de minimis exception to the worldwide income reporting requirement.

This is incorrect: there is no such de minimis exception. You must disclose your foreign income on your US tax return no matter how small it is.

This myth has a special significance in the context of offshore voluntary disclosures. The Delinquent FBAR Submission Procedures can only be used if there is no income noncompliance. Oftentimes, taxpayers cannot benefit from this voluntary disclosure option, because they failed to disclose an interest income of merely ten or twenty dollars.

Worldwide Income Reporting Myths: Foreign Earned Income Exclusion

Finally, the fourth myth comes from the misunderstanding of the Foreign Earned Income Exclusion (the “FEIE”). The FEIE allows certain taxpayers who reside overseas to exclude a certain amount of earned income on their US tax returns from taxation as long as these taxpayers meet either the physical presence test or the bona fide residency test.

Some US taxpayers misunderstand the rules of the FEIE and believe that they are allowed to exclude all of their foreign income as long as they reside overseas. A variation on this myth ignores even the residency aspect; the taxpayers who fall into this trap believe that the FEIE excludes all foreign income from reporting.

This myth and its variation are wrong in three aspects. First of all, even in the case of FEIE, all of the foreign earned income must first be disclosed on a tax return and then, and only then, would the taxpayer be able to take the exclusion on the tax return. Second, the FEIE applies only to earned income (i.e. salaries or self-employment income), not passive income (such as bank interest, dividends, royalties and capital gains). Finally, as I already stated, in order to be eligible for the FEIE, a taxpayer must satisfy one of the two tests: the physical presence test or the bona fide residency test.

Contact Sherayzen Law Office for Professional Help With Your Worldwide Income Reporting

Worldwide income reporting can be an incredibly complex requirement despite its appearance of simplicity. In this essay, I pointed out just four most common traps for US taxpayers; there are many more.

Hence, if you have foreign income, contact Sherayzen Law Office for professional help. Our highly-experienced tax team, headed by a known international tax lawyer, Mr. Eugene Sherayzen, has helped hundreds of US taxpayers to bring themselves into full compliance with US tax laws. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Worldwide Income Reporting Requirement | IRS International Tax Lawyer

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Worldwide income reporting is at the core of US international tax system. Yet, every year, a huge number of US taxpayers fail to comply with this requirement. While some of these failures are willful, most of this noncompliance comes from misunderstanding of the worldwide income reporting requirement. In this essay, I will introduce the readers to the worldwide income reporting requirement and explain who must comply with it.

Worldwide Income Reporting Requirement: Who is Affected

It is important to understand that the worldwide income reporting requirement applies to all US tax residents. US tax residents include US citizens, US Permanent Residents (the so-called “green card” holders), taxpayers who satisfied the Substantial Presence Test and non-resident aliens who declared themselves US tax residents on their US tax returns. This is the general definition and there are certain exceptions, including treaty-based exceptions.

Worldwide Income Reporting Requirement: What Must Be Disclosed

The worldwide income reporting requirement mandates US tax residents to disclose all of their US-source income and all of their foreign-source income on their US tax returns. This seems like a very straightforward rule, but its practical application creates many tax traps for the unwary, which I will discuss in a future article.

Worldwide Income Reporting Requirement: Constructive Income and Anti-Deferral Regimes

It is important to emphasize that the worldwide income reporting requirement requires the disclosure not only of the income that you actually received, but also the income that you are deemed to have received by the operation of law. In other words, US tax residents must also disclose their constructive income.

One of the most common sources of constructive income in US international tax law are Anti-Deferral regimes that arise from the ownership of a foreign corporation. The two most common regimes are Subpart F rules (which apply only to a Controlled Foreign Corporation) and the brand-new GILTI  regime. You can find out more about these two highly-complex US tax laws by searching the articles on our website.

Contact Sherayzen Law Office for Professional Help With the Worldwide Income Reporting Requirement

The worldwide income reporting requirement can be extremely complex; you can easily get yourself into trouble with the IRS over this issue. In order to avoid making costly mistakes and correct prior US tax noncompliance in the most efficient manner, you should contact Sherayzen Law Office help. We have helped hundreds of US taxpayers to comply with their US international tax obligations with respect to foreign income and foreign assets, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Mexican Bank Accounts & US Tax Obligations | International Tax Lawyers

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In this essay, I would like to discuss three main US tax obligations concerning Mexican bank accounts: the worldwide income reporting requirement, FBAR and Form 8938. I will only concentrate on the obligations concerning individuals, not business entities.

Mexican Bank Accounts and US Tax Residents

Before we delve into the discussion concerning US tax obligations, we should establish who is required to comply with these obligations. In other words, who needs to report their Mexican bank accounts to the IRS?

The answer to this question is clear: US tax residents. Only US tax residents must disclose their worldwide income and report their Mexican bank accounts on FBAR and Form 8938. Non-resident aliens who have never declared themselves as US tax residents do not need to comply with these requirements.

US tax residents include US citizens, US Permanent Residents, an individual who satisfied the Substantial Presence test and an individual who properly declares himself a US tax resident. This is, of course, the general rule; important exceptions exist to this rule.

Mexican Bank Accounts: Worldwide Income Reporting Requirement

US tax residents must disclose their worldwide income on their US tax returns, including any income generated by Mexican bank accounts. In other words, all interest, dividend and royalty income produced by these accounts must be reported on Form 1040. Similarly, any capital gains from sales of investments held in Mexican bank accounts should also be disclosed on Form 1040. US taxpayers should pay special attention to the reporting of PFIC distributions and PFIC sales.

It is also possible that you may have to disclose passive income generated by your Mexican business entities through the operation of Subpart F rules and the GILTI regime, but this is a topic for a separate discussion.

Mexican Bank Accounts: FBAR

US tax residents must disclose on FBAR their ownership interest in or signatory authority or any other authority over Mexican bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. FBAR is a common acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. Even though this is a FinCEN Form, the IRS is charged with the enforcement of this form since 2001.

While seemingly simple, FBAR contains a number of traps for the unwary. One of the most common trap is the definition of “account”. For the FBAR purposes, “account” has a much broader definition than what people generally think of as an account. ‘Account” includes not just regular checking and savings accounts, but also investment accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a financial institution and a US person’s foreign asset.

FBAR is a very dangerous form. Not only is the filing threshold very low, but there are huge penalties for FBAR noncompliance. For a willful violation, the penalties can go up to $100,000 (adjusted for inflation) per account per year or 50% of the highest value of the account per year, whichever is higher. In special circumstances, the IRS may refer FBAR noncompliance to the US Department of Justice for criminal prosecution. Even non-willful FBAR penalties may go up to $10,000 (again, adjusted for inflation) per account per year.

Mexican Bank Accounts: FATCA Form 8938

The final requirement that I wish to discuss today is the FATCA Form 8938. Born out of the Foreign Account Tax Compliance Act, Form 8938 occupies a unique role in US international tax compliance. On the one hand, it may result in the duplication of a taxpayer’s US tax disclosures (especially with respect to the accounts already disclosed on FBAR). On the other hand, however, Form 8938 is a “catch-all” form that fills the compliance gaps with respect to other US international tax forms.

For example, if a taxpayer holds a paper bond certificate, this asset would not be reported on FBAR, because it is not an account. For the Form 8938 purposes, however, the IRS would consider this certificate as part of assets that fall within the definition of the Specified Foreign Financial Assets (“SFFA”).

Hence, the scope of Form 8938 is very broad. It requires a specified person (this term is almost equivalent to a US tax resident) to disclose all SFFA as long as these SFFA, in the aggregate, exceed the applicable filing threshold.

SFFA includes a huge variety of foreign financial assets which are divided into two sub-categories: (a) foreign bank and financial accounts; and (b) “other” foreign financial assets. The definition of the “other” assets is impressive in its breadth: bonds, stocks, ownership interest in a closely-held business, beneficiary interest in a foreign trust, an interest rate swap, currency swap; basis swap; interest rate cap, interest rate floor, commodity swap; equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty; an option or other derivative instrument with respect to any currency or commodity that is entered into with a foreign counterparty or issuer; and so on.

Form 8938 requires not only the reporting of SFFA, but also the income generated by the SFFA. In essence, the worldwide income reporting requirement is incorporated directly into the form.

The filing threshold for Form 8938 is more reasonable than that of FBAR for specified persons who reside in the United States, but it is still fairly low (especially for individuals). For example, if a taxpayer lives in the United States, he will need to file Form 8938 if he has SFFA of $50,000 ($100,000 for a married couple) or higher at the end of the year or $75,000 ($150,000 for a married couple) or higher during any time during the year. Specified persons who reside outside of the United States enjoy much higher thresholds.

Form 8938 has its own penalty system which contains some unique elements. First of all, a failure to comply with the Form 8938 requirements may allow the IRS to impose a $10,000 failure-to-file penalty which may go up to as high as $50,000 in certain circumstances. Second, Form 8938 noncompliance will lead to an imposition of much higher accuracy-related penalties on the income tax side – 40% of the additional tax liability. Third, Form 8938 noncompliance will limit the taxpayer’s ability to utilize the Foreign Tax Credit.

Finally, a failure to file Form 8938 will directly affect the Statute of Limitations of the entire tax return by extending the Statute to the period that ends only three years after the form is filed. In other words, Form 8938 penalties may allow the IRS to audit tax years which otherwise would normally be outside of the general three-year statute of limitations.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Mexican Bank Accounts

Sherayzen Law Office’s core area of practice is international tax compliance, including offshore voluntary disclosures – i.e. helping US taxpayers with foreign assets and foreign income to stay in US tax compliance and, if a taxpayer fails failed to comply with US tax laws in the past, bring him into compliance through an offshore voluntary disclosure. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Overseas Green Card Holder & US Tax Residency | Tax Lawyer & Attorney

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While most US taxpayers understand that a US permanent resident who resides in the United States is a US tax resident, there seems to be a great deal of confusion over whether the same is true with respect to a US permanent resident who resides overseas (hereinafter, “Overseas Green Card Holder”). In other words, the question is whether an Overseas Green Card Holder should be considered a US tax resident?

It is important to clear up this confusion, because an individual non-resident only needs to report to the IRS his US-source income and income effectively connected to the United States. On the other hand, a US tax resident must disclose to the IRS his worldwide income and his foreign assets. A failure to report foreign income and foreign assets will expose the noncompliant taxpayer to IRS penalties. In the context of US international information returns, these IRS penalties can be particularly cruel; FBAR penalties and FATCA penalties are the most important examples of the severity with which the IRS may punish noncompliant green card holders.

Now that we understand the importance of determining whether an individual is a US tax resident, we can proceed with answering the question of whether an Overseas Green Card Holder is a US tax resident. The answer is an emphatic “yes”.

A US Permanent Resident is always a US tax resident (unless his permanent residency is stripped away for noncompliance with US immigration laws). The location of his physical residency does not matter. This means that an Overseas Green Card Holder should properly report his worldwide income and his foreign assets to the IRS, including the filing of any required FBARs and/or Forms 8938.

For example, if a US Permanent Resident resides in the United Kingdom, earns a salary and owns UK bank accounts, he should disclose his UK income in the United States and report his UK bank accounts on his Schedule B to Form 1040. He should also verify if he needs to disclose his UK bank accounts on FBAR and Form 8938, among other potential US tax requirements.

Contact Sherayzen Law Office for Professional Hep With Your US Tax Compliance if You Are an Overseas Green Card Holder

If you are a US permanent resident who resides in foreign country, contact Sherayzen Law Office for professional tax help as soon as possible. Our highly-experienced international tax attorney, Mr. Sherayzen, will personally analyze your legal situation, determine the US tax requirements that may apply in your situation and create your tax compliance plan, including one that includes an offshore voluntary disclosure to remedy any past US international tax noncompliance. Then, our professional tax team, under the supervision of Mr. Sherayzen, will prepare all of the required tax documents while Mr. Sherayzen implements the overall legal plan.

Contact Us Today to Schedule Your Confidential Consultation!

EU Tax Harmonization Initiative Stalled by Ireland and Hungary | Tax News

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The EU Tax Harmonization initiative faced a joint opposition of Ireland and Hungary in early January of 2018. Both countries are vehemently opposed to any effort that would “tie their hands” in terms of their corporate tax policies.

The EU Tax Harmonization Initiative

Tax Harmonization is basically a policy that aims to adjust the tax systems of various jurisdictions in order to achieve one tax goal. The adjustment usually implies equalization of tax treatment.

In the past, the EU tax harmonization efforts were mostly limited to Value-Added Tax (“VAT”) and certain parent-subsidiary taxation issues. Since at least 2016, however, the EU Tax Harmonization policy seeks to regulate corporate income taxes among its members in order to limit intra-EU tax competition.

In 2016, the European Commission released two proposed directives addressing the issues of a common corporate tax base and a common consolidated corporate tax base. Neither directive establishes a minimum corporate tax rate. Neither directive passed the internal EU opposition.

Irish and Hungarian Opposition to the EU Tax Harmonization of Corporate Taxation

Today, the EU internal opposition to the EU tax harmonization initiatives consists of Ireland and Hungary. Both Hungary and Ireland have very low (by EU standards) corporate tax rates. The Irish corporate tax rate is 12.5% and the Hungarian corporate tax rate is only 9% (the EU average corporate tax rate is about 22%).

In early January of 2018, the Hungarian Prime Minister Viktor Orbán and Irish Prime Minister Leo Varadkar both stated that their countries have the right to set their corporate tax policies and that this area should not be subject to the EU tax harmonization efforts. “Taxation is an important component of competition. We would not like to see any regulation in the EU, which would bind Hungary’s hands in terms of tax policy, be it corporate tax, or any other tax,” Mr. Orbán said. He further added that “we do not consider tax harmonization a desired direction.”

Both countries view the aforementioned proposed 2016 European Commission directives as a threat, because harmonizing of the tax base could lead to corporate income tax rate harmonization.

Impact of Brexit on the EU Tax Harmonization Initiatives

The United Kingdom used to be in the same opposition camp as Ireland and Hungary. Given the size of its economy and its political influence, the United Kingdom was an almost insurmountable barrier to the proponents of greater EU unity (mainly France and Germany). In essence, the UK was enough of a counterweight to keep the balance of power within the European Union from tilting in favor of the EU unity proponents.

Everything has changed with Brexit. The exit of the United Kingdom from the EU automatically led to the shift of the balance of power in favor of Germany. Brexit also means that Ireland and Hungary are now alone in their resistance against the Franco-German efforts to achieve greater EU unity. The political pressure of these outliers is now enormous.

In fact, it appears that, rather than suspending the unanimity requirement by invoking the so-called “passerelle clauses” (which would be a highly controversial step), the proponents of the EU Tax Harmonization initiative will simply wait until this political pressure forces Ireland and Hungary to modify their positions on this issue.