Hi and welcome to Sherayzen Law Office video blog. My name is Eugene Sherayzen and I’m an international tax attorney and owner of Sherayzen Law Office, Ltd. and today we are continuing our series of blogs from the Czech Republic. Right now, I’m on the way to Prague from Karlovy Vary and I wanted to make this blog about the Worldwide Income Reporting, particularly about the myths which surround the worldwide reporting requirement.
The general rule is that if you are a US Tax Resident that you must disclose your worldwide income on your US Tax Returns; but there are a number of myths on the internet especially which say that there are certain exceptions to this requirement. So, lets go over these worldwide income reporting myths.
The most frequent and the most dangerous myth is the ‘local taxation’ myth. Under the ‘local taxation’ myth, a taxpayer believes that he doesn’t have to report his income, his foreign income because it is subject to local taxation. So, for example if you have a foreign account in the Czech Republic and there’s tax withholding on all the income produced by the account then you don’t have to report the income. And sometimes some people even believe that you don’t even have to report the account itself. This is a completely false assumption; there is no basis for it whatsoever. Even if income is subject to local taxation, it still needs to be reported on your US Tax Return.
The second myth which is also very common is that you only pay taxes in the jurisdiction where you earned the income; the so called ‘territorial taxation’ myth. This myth is very popular for a very good reason. A lot of countries actually would not tax income that is earned in another jurisdiction. Unfortunately, the United States is not one of them. Under US Tax Law irrespective of where the income is earned, it’s taxed in the United States as long as you are a US Tax Resident. The fact that it’s earned in another jurisdiction has no influence on the tax law whatsoever.
And then finally, there is an interesting belief that is held by some people is that there is some sort of ‘de minimis’ exception to the worldwide reporting requirement. And that is also not correct.There is no de minimis exception to the worldwide income reporting requirement. Even if you earn one dollar of foreign income, you still need to report it. Even if you earn ten dollars, one hundred dollars, it doesn’t matter; you still have to report it. Now I believe the reason why this myth exists is because of the $10,000 interest in the foreign account requirement for FBAR purposes. So FBAR as you may know is an information return that US Persons must file in the United States. It’s not part of the internal revenue code but it is administered by the IRS. And in order to be subject to FBAR filing requirement, you have to have at least $10,000 in your foreign accounts. Technically speaking, the highest aggregate value should be in excess of $10,000, but that amount $10,000 kind of sticks in people’s minds and they think this is the amount of income that you have to have in order for foreign income to be reportable on your US Tax Return. That is also not true: $10,000 is something that is relevant to FBAR only and has nothing to do with actual income, it has to do with balances.
So, these are the three most common worldwide income exception myths. If you follow any one of them, you are most likely not in compliance with US Tax Laws and if this is the case, I suggest that you contact me as soon as possible. You can call me at (952) 500-8159 or you can email me at [email protected]. Thank you for watching and until the next time.