US International Tax Reporting
Expats, FBAR, and FATCA
Tax reporting for US expats and taxpayers with foreign income, bank accounts and other activities can be complex.
Compliance lapses or errors can result in substantial penalties.
For taxpayers who are not currently in compliance, relief from these penalties may be available.
Overview of US International Taxation and Reporting
US taxation of US individuals living or working abroad continues to change and involves complex reporting rules. This includes expatriates or expats who are living abroad for retirement on a permanent basis. Many US citizens and permanent residents (Green Card holders) do not realize that they are subject to US income tax regardless of where they live or work. In addition to income tax, the US has foreign bank account reporting (FBAR) and FATCA reporting requirements for expats with account balances above a $10,000 threshold during the year. Failing to file required FBARs and Form 8938 for FATCA reporting can result in substantial penalties and possible imprisonment. The rules can be complex and should be considered as part of any US taxpayer's annual compliance process. These rules also apply to businesses.
US Expat Income Taxation
US citizens and permanent resident holders are subject to US income tax wherever they live. Many taxpayers believe, understandably, that if they live abroad they do not have to pay US income taxes or pay tax on income earned while working outside the US. Unfortunately, the US imposes tax on a worldwide basis and taxpayers must file Form 1040 to report individual income tax while working or living outside the country.
Many US taxpayers have heard of an FBAR and may be aware of huge penalties related to compliance failures or the government's use of FBARs to track hidden foreign bank accounts. Taxpayers should know the rules and seek assistance to understand their FBAR compliance responsibilities, prepare the FBARs and catch up on unfiled FBARs if necessary.
What is an FBAR?
An FBAR is the Report of Foreign Bank and Financial Accounts. This form, as the name implies, is used to report certain bank and financial account information for US persons. The Treasury uses the FBAR information for various purposes under the Bank Secrecy Law.
How Do I File an FBAR?
An FBAR and related bank account information are reported annually using FinCEN Form 114. The FBAR form itself is submitted electronically unless a taxpayer cannot do this. A request must be made to Treasury to paper file the FBAR form.
What is the Filing Deadline for an FBAR?
An FBAR is required to be filed by the due date of the taxpayer's income tax return for each year that an FBAR is required to be filed by an individual taxpayer. If an extension is granted for a taxpayer's Form 1040 or other income tax return (e.g., Form 1120 for a corporate taxpayer), then the taxpayer is automatically granted an extension to file an FBAR.
What are the Penalties for Failure to File an FBAR?
Penalties can include civil monetary penalties for each unfiled FBAR and criminal penalties where evasion is a motive. Amnesty programs exist to provide taxpayers who are non-compliant with a means to become compliant and move forward without fear of civil or criminal penalties.
Does the IRS or Treasury Offer an FBAR Amnesty Program?
Options exist for taxpayers who have unfiled FBARs. For taxpayers who have reported all income that relates to unfiled FBARs, filing the FBARs is an option. For taxpayers who have unreported income, there may be other options to get back into compliance but these may not involve filing the FBAR according to the normal process.
The Foreign account Tax Compliance Act (FATCA) is a tax act that is used to fight tax evasion for US persons holding accounts and other financial assets offshore. FATCA is in addition the more commonly known FBAR reporting requirement and there are serious penalties for non-compliance. The minimum threshold is $50,000 of asset value for total foreign assets held. The reporting is done on Form 8938, which is attached to the taxpayer's tax return. Different rules apply to taxpayers depending on whether the taxpayer lives inside or outside the US. The rules are more relaxed for taxpayers living outside the US.
US Reporting for US Taxpayers with Foreign Activities
US taxpayers with foreign activities may have to file a Form 5471 if the foreign activities are performed by a corporation or on the individual's US income tax return Form 1040. Depending on where the taxpayer lives, an individual taxpayer may use Form 911 to reduce US taxes for foreign taxes paid while working and living abroad. Foreign tax credits may also be available to reduce a US taxpayer's tax liability.
Foreign Taxpayers in the US (Inbound Taxation)
Foreign taxpayers with US activities, whether earned income from working in the US or investments in the US, should review the applicable tax rules to minimize taxes prior to engaging in US activities. Tax treaties may be available to reduce or avoid US tax and limit taxation to the home country. Foreign taxpayers should also be aware of possible state tax reporting that may differ from US reporting.
Foreign owners of real estate may have to pay US FIRPTA tax when selling or transferring the real property. This could relate to investment property for commercial or residential use. A certificate and compliance may be required to either avoid paying this tax or reduce the tax withheld. Taxpayer's should also consider planning for exiting real property to potentially avoid FIRPTA altogether and minimize US income tax related to the rental or investment property.