The U.S. Internal Revenue Services (IRS) routinely investigates, penalizes, and even brings criminal charges against individual U.S. taxpayers who fail to report foreign incomes and assets. You don't have to be an international drug kingpin or have millions in a secret offshore account to become the focus of an IRS investigation, nor do you have to be a U.S. citizen or physically present in the United States to be considered a "U.S. taxpayer" subject to U.S. tax law. In fact, the United States is unusual in that worldwide income by U.S. taxpayers is subject to U.S. taxation (though this doesn't necessarily mean U.S. taxes are owed for non-U.S. income). It is also extremely aggressive in enforcing U.S. tax laws outside the United States. A recent example of this is the 2015 FIFA corruption case, in which most of the people charged with financial crimes by the U.S. government following an IRS investigation were not U.S. citizens and spent little or no time in the U.S. In short, international tax compliance is a top priority of the IRS and its parent organization, the U.S. Department of the Treasury, and it is crucial that you comply with any and all laws and regulations that may apply to you.

 

Every year many U.S. residents accidentally find themselves in potential trouble with the IRS because they've failed to report certain assets they've acquired overseas (such as inheriting shares in a family business or a deceased relative's bank account), or because they maintain financial accounts in another country with which they have past or ongoing connections (such as a private pension scheme they've funded while working in their birth country, or a savings or current account in a country where they used to live or plan to retire). This is especially common for people currently working in the U.S. on an H1-B, L-1, TN-1, or E-3 visa (and their spouses), lawful permanent residents (also known as green card holders), and naturalized U.S. citizens, as well as for U.S. citizens and green card holders living outside the U.S. as expatriates, digital nomads, or retirees. Some people even run into problems because they hold U.S. birthright citizenship (meaning they were born in the United States, or were born abroad to a U.S. citizen parent) but have never lived in the U.S. as adults and don't consider themselves to be "American." A famous example is UK Prime Minister Boris Johnson, who owed the IRS tens of thousands of dollars in taxes after he sold his London home at a profit. Why? He had been born in New York while his British parents were working there temporarily, making him a U.S. citizen. (He has since renounced his U.S. citizenship.)

 

One reason that so many people find themselves out of international tax compliance is that, unlike almost all other countries, the United States requires all U.S. citizens and "resident aliens" (green card holders and some others) to file U.S. income taxes on all worldwide income regardless of where they live, if they earn more than the current IRS "standard deduction" amount (currently set at US$12,000/year for an individual). However, the IRS grants a foreign earned income exclusion and other foreign income tax credits that can offset some or all taxes paid in another country. This means that many U.S. taxpayers actually will not owe U.S. income taxes on their non-U.S. income, even though they must still file U.S. taxes. For example, if you are a U.S. citizen living in Canada, and earn all your income working in Canada for a Canadian company, have an annual salary of $60,000 (that is, roughly US$45,000), and pay income taxes in Canada, you still must file income taxes in the U.S., even though you won't actually owe any U.S. taxes on your Canadian income. There are many exceptions, exclusions, tax treaties, and other considerations that make hiring a tax attorney a very good idea for anyone who is either a U.S. citizen or permanent resident earning income outside the U.S. (including self-employment income), or a non-U.S. citizen who has had a "substantial presence" in the U.S.

Besides your worldwide income, the U.S. Department of the Treasury requires you to make an annual report of your financial interest in (or signature authority over) any financial accounts you hold outside the U.S. that exceed a certain threshold, including bank accounts, brokerage accounts, mutual funds, and trusts. This is done by filing a Report of Foreign Bank and Financial Accounts (FBAR) (also known as FinCEN 114) electronically with the Treasury Department. In addition, the Foreign Account Tax Compliance Act (FATCA) of 2010 requires certain U.S. taxpayers who hold foreign financial assets with a total value of more than a certain reporting threshold (which begins at $50,000, but may be higher for certain individuals) to report information about these assets on IRS Form 8938 as part of their annual federal income tax filing. That's correct: many people will have to report the same foreign financial accounts twice each year, both on an FBAR and on IRS Form 8938FBAR and FATCA aren't taxes. The U.S. government is not actually trying to tax your foreign financial assets; rather, they want to keep track of your accounts outside the U.S. to make sure you're not evading U.S. taxes and hiding the unreported funds in another country. Also note that non-financial assets like real estate, precious metals, cars, artwork, and jewelry aren't subject to FBAR or FATCA reporting requirements, nor are any foreign banknotes and coins you hold or any funds held for you in a government-run social insurance program like the Canada Pension Plan (CPP) or the UK and Ireland State Pension schemes.

As you can see, international tax compliance for individuals is extremely complex, and U.S. taxpayers who earn income or hold financial assets outside the U.S. need to ensure their paperwork is in order to avoid serious penalties. For example, U.S. citizens can have their passport revoked if they owe substantial tax debt to the IRS, which can put a quick stop to your international lifestyle or work situation. At Gold Path Tax, we are experts in helping you comply with these complicated and constantly changing rules, and in helping you to resolve any existing issues you may have, such as by preparing your application to the Streamlined Domestic Offshore Procedures (SDOP) programWe can also help you prepare your annual U.S. federal and state tax returns and supporting documentation to ensure ongoing compliance with U.S. tax laws. Contact us at +1 248 246 1154, or by e-mail at goldie@goldpathtax.com, for a free initial consultation with our Managing Attorney, Goldie Greenstein, about your situation. Regardless of where you call home, if you're a U.S. taxpayer, we can help you with your United States taxes.

© 2019 by Gold Path Group LLC. All rights reserved.

Disclaimer: This website is for informational purposes only, and is not intended to provide legal advice. If you have a tax issue, you should seek counsel from a qualified professional.

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