U.S. citizens and Lawful permanent residents living outside the U.S. generally have additional tax and financial account (from the Bank Secrecy Act – “BSA”) reporting requirements. These filings are unique for persons who reside in their home country compared to those who reside in the U.S.
The forms and basic concepts that may be applicable are as follows:
A common misconception that contributes to the international tax gap is that this potentially excludable foreign earned income is exempt income not reportable on a US tax return. In fact, only a qualifying individual with qualifying income may elect to exclude foreign earned income and this exclusion applies only if a tax return is filed and the income is reported.
In addition to filing a U.S. tax return, the taxpayer must meet the residency tests and file IRS Form 2555, Foreign Earned Income
Importantly, as the government explains, ” . . . Once you choose to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on income you can exclude. If you do take the credit, one or both of the choices may be considered revoked. . . ”
In addition to filing a U.S. tax return, the taxpayer must meet various conditions for eligibility for the foreign tax credit. The calculation is complex and is ultimately reported on IRS Form 1116 and must be attached to the income tax return, which will always be IRS Form Form 1040 for U.S. citizens and LPRs who reside in a country with no U.S. income tax treaty; and could be IRS Form 1040NR for certain LPRs residing in a country with a U.S. income tax treaty.
C) Information Reporting Requirements
There can be multiple reporting requirements, depending upon the type of transaction, foreign asset, etc.
A summary of these reporting requirements is set forth towards the end of the article “Accidental Americans” – Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web” International Tax Journal,CCH Wolters Kluwer, Nov./Dec. 2012, Vol. 38 Issue 6, p45.
In addition to the forms reflected in the article, IRS Form 8938 Statement of Specified Foreign Financial Assets became part of the law for 2011 tax year filings in 2012. There is often overlap of reporting on this form and the FBAR referred to below.
This form 8938, along with most other forms must be attached to your income tax return (e.g., IRS form 1040) when filed with the IRS. It is common for most types of tax preparation software NOT to have support for this and other particular forms that must be filed regarding non-U.S. assets. Accordingly, the forms often times need to be completed manually by using an Adobe Acrobat version.
The definition of “ownership interest in” or “signature authority over” is very broad under the FBAR regulations. See, FOREIGN BANK ACCOUNT REPORTS – 2011 REGULATIONS EXTEND RULES TO MANY UNAWARE PERSONS
The filing of the FBAR form is not with the IRS, but rather with FinCEN. It must now be filed electronically on Form 114, Report of Foreign Bank and Financial Accounts through the BSA E-Filing System website. The electronic form supersedes TD F 90-22.1 (the FBAR form that was used in prior years).
The penalties for not filing or even filing late are by statute $10,000 for each failure to file (or up to 50% of the account balances when intentionally not filed by the person with the requirement to file).
* Simply More Compliance Obligations for Persons Residing Outside the U.S.
At the end of the day, a USC or LPR residing outside the U.S. necessarily has a much greater burden of tax compliance and filings of these forms, compared to someone living in the U.S. without foreign bank accounts, foreign assets, foreign income, etc.