Unreported Foreign Income

A U.S Taxpayer has very specific tax and reporting requirements to the IRS. Should the taxpayer have unreported income, accounts, or assets from overseas, there are various offshore tax amnesty procedures that are available to them to either limit or eliminate penalties. However, this is only viable if the foreign income, accounts, or assets were not reported unintentionally.

Disclosing Unreported Foreign Income

As the U.S. taxes filers on their worldwide income, the taxpayer should primarily assess their foreign income sources to determine what overseas earnings they have not reported.

This applies to all U.S. Persons, whether they reside in the U.S. or overseas — and whether the income is U.S. or foreign sourced. 

Types of Unreported Foreign Income:

• Foreign capital gains receive the same long-term or short-term treatment under US tax return as if it was a US asset.
• If you are receiving dividends, then you may be able to obtain qualified dividends, but this depends on which country you have assets in.
• If you are receiving foreign interest income you still report the income on your tax return, and pay U.S. tax at your ordinary tax rate; even if it is in a country which does not tax that category of passive income such as Hong Kong or Singapore.

Foreign Tax Credits:

The intent of the Foreign Tax Credit is to avoid or limit any double-taxation on foreign income you earned abroad but already paid on

You may be entitled to a foreign tax credit if you have already paid foreign taxes on your foreign income; either by filing a foreign tax return or have money withheld from your account abroad.

Filing U.S. Tax Returns

You may be able to widen your options available to you for amnesty if you have consistently been filing your US tax returns.

If you would like to discuss this further, please contact us.

What is a Streamlined Foreign Offshore Procedure?

The Streamlined Foreign Offshore Procedures (SFOP) is a method implemented by the IRS for foreign tax residents which allows them to be brought into offshore compliance. By doing this, the taxpayer can submit amended or original tax returns for prior years; and international information returns such as the FBAR.

Following the SFOP means taxpayers can disclose previously unreported offshore bank accounts, assets, income, and investments without being penalised for past foreign account violations that they may hold. In this case, all FBAR penalties, along with other foreign asset penalties will be waived by the U.S. Government.

Eligibility for the Program

A U.S person must meet 3 main requirements to apply for the Streamlined Foreign Offshore Procedure:

• They must be non-wilful
• They must qualify as a “Foreign Resident”
• They should not be under audit

1. Non-Willful

• • If a person was unaware that there was a foreign account, foreign income, or foreign asset reporting requirement, the applicant may qualify as non-willful.

2. Foreign Resident

• • To qualify as “Foreign Resident,” you must be either a:

• • U.S. Citizen or Legal Permanent Resident (Green Card Holder) and reside outside of the United States for at least 330 days in any one of the last three; or
  • Not qualify as a U.S. Citizen or Legal Permanent Resident, and not meet the Substantial Presence Test in at least one of the last three (3) tax years) you may obtain a waiver of all FBAR and FATCA penalties.

3. Under Audit or Examination?

• • If the IRS has instigated a civil examination of taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. (IRS)

• • A taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures. (IRS)

It would be advisable to fulfil the SFOP if needed as the IRS have recently implemented a more aggressive approach to foreign residents with a U.S. status who have unreported offshore bank accounts, assets, income and investments by enforcing larger penalties. 

Following Streamlined Foreign Offshore Procedures allows for all penalties to be avoided.

If you would like to discuss this further, please contact us.

Long Term Resident (LTR) – is a Legal Permanent Resident (LPR) who has been an Lawful Permanent Resident (LPR) or Green Card Holder for at least 8 of the last 15 years.

However, to be a Long-Term Resident, the person is not required to live in the U.S. but the LTR is given the privilege to do so should they wish.

Lawful Permanent Resident (LPR) – is given the privilege to permanently reside in the United State, in accordance to the U.S. immigration laws.

You cannot be classified as a Lawful Permanent Resident if you:

• Commenced to be treated as a resident of a foreign country under a tax treaty.
• Profited from benefits of such treaty applicable to foreign residents
• Notified the IRS of such a position on a Form 8833 attached to a timely filed income tax return.

If a U.S. Person who is currently an LTR were to commence to be treated as a resident of another foreign treaty country, they will then be classified and treated as an expatriate.

Important notes on filing Form 8833

It would be incorrect to believe that filing a Form 8833 will automatically prevent them from being treated as a U.S Person. If the person has already met the time requirements (8 out of 15 years) to be considered an LTR, then by filing the 8833, it will be considered the expatriating act.

For this reason, to avoid serious tax consequences, it is extremely important and necessary to plan your expatriation correctly.

We have experienced tax advisors on our team who can help you prepare for your expatriation. 

If you would like to discuss this further, please contact us.

IRS Audit Campaign Targets Nonresident Alien U.S. Real Estate Activities

Two IRS audit campaigns have recently been introduced with prospect to increase NRA compliance with the extensive and complex U.S. tax rules in relation to U.S. real property transactions. 

On October 5^th, 2020, the IRS LB&I (Large Business and International Division) announced the introduction of their latest audit campaign which targets NRA’s (non-resident aliens) who do not correctly report rental income from their U.S. properties.

Another audit campaign was issued on September 14^th 2020 by the LB&I which targeted the non-compliance of NRAs in relation with the withholding of tax and reporting obligations (on the disposition of U.S. real property interests under the FIRPTA 1980)

Key reasons for the introduction of the two audit campaigns:

• Purchase of U.S. real estate by foreign nationals in a major source of investment in the United States.
• In 2019, there was a total of $78 billion of property sales to foreign buyers.
• Figures show that in recent years, the largest share of foreign residential buyers originated from China, Canada, and Mexico.

FIRPTA 1980 – Foreign Investment in Real Property Tax Act of 1980

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA 1980) was introduced to ensure that investors pay U.S. federal tax on the sale or disposition of U.S. real property interests (also known as USRPI)

U.S. Real Property Interest (USRPI)

A USRPI is an individual, other than a creditor, who holds an in interest in real property located in the U.S. 

U.S. Taxation of Rental Income

Non resident aliens are subject to a 30% U.S. withholding tax on the gross amount of rent received. This is applied on top of the FIRPTA taxation regime that applies to the disposition of the USRPI.

Conclusion

The main purpose of the newly introduced audit campaigns for U.S. real estate that targets non-resident aliens is to focus on NRA non-compliance.

The initiatives behind the two campaigns are to improve and encourage NRA compliance through guidance and examinations implemented by the IRS.

Due to the complexity of the subject, it is advisable that NRA investors seek appropriate and professional advice before the purchase of any U.S. real estate property.

We have highly experienced professionals on our team who would be happy to help. Please call for further information.

FBAR filing requirements 

The FBAR (Foreign Bank and Financial Account Reporting) is necessary for a U.S. person to report their foreign accounts and they may be penalised if they fail to report their foreign bank and financial accounts to the IRS on time.

Therefore, it would be ideal to engage with experienced tax advisors if representation is needed.

Foreign Account Representation

The FBAR Form (also known as FinCEN Form 114) is required to be filed if a U.S. person holds foreign accounts and meets the reporting threshold; the deadline to file this form is normally April 15 although it may be possible to file an extension.

A U.S. person may be subject to fines and penalties if there is a failure to file an FBAR form or filing a late and/or incomplete form and they may still be liable to penalisation if the violation is unintentional. Criminal penalties can also be applied; however, this is uncommon. 

Choosing the right tax advisors to file your FBAR:

We are experienced tax advisors:

Our tax advisors have more than 20 years of professional experience.

A key factor in offshore disclosure is the development and implementation of a legal approach and strategy; for this reason, it is crucial to find a tax advisor who specialises in this area of Tax.

FBAR disclosure experience:

Although acquiring Enrolled agent, tax and accounting qualifications may aid the case, it does not substitute for extensive offshore disclosure experience.

We are experienced tax advisors who deal with Streamlined Foreign Offshore Procedure cases continually with positive results.

If you would like to discuss this further, please contact us.

What is Expatriation?

Expatriation is the process of renouncing a U.S person’s status. 

Expatriation does not necessarily involve exit tax, and whether a person qualifies as an expatriate is not determined wholly by their net worth. If an expatriate is able to apply proper exit tax planning, they could potentially avoid, or minimise, exit tax.

Expatriation is not only for U.S. Citizens

An expatriate can also be a permanent resident as well as a U.S. citizen renouncing their U.S citizenship.

When a legal permanent resident has maintained the legal permanent resident status for a minimum of eight of the last 15 years, they are considered a long-term resident and subject to the covered expatriate analysis.

Please also note that allowing your green card to expire is not an acceptable or valid act of expatriation.

Covered Expatriates

In order to be considered a covered expatriate, the expatriate must meet one of the three tests below:

• Net income tax liability
• Net worth
• Unable to certify tax compliance for five prior years.

Expatriation Methods:

The method of which a U.S. person takes to complete the expatriating act depends on whether a person is a long-term resident or a US citizen. This needs discussion and it is likely advice will be required to complete this process.

Covered Expatriate – Post Expatriation Consequences

It is best for the expatriate to avoid covered expatriate status as even after a covered expatriate leaves the United States, there may be following issues, such as:

• Annual Form 8854 filings
• Gift tax consequences for gifts from covered expatriates to U.S. persons (which will result in an immediate tax liability to the US person).

Exit Tax: Mark-to-Market & Deemed Distribution

Just because a person is considered a covered expatriate, does not mean they will owe exit tax.

The person must evaluate their assets to determine which assets are subject to the mark-to-mark analysis on the unrealized capital, and which assets are possibly subject to the deemed distribution rules.

If you would like to discuss this further, please contact us.

When renouncing their U.S. status, U.S. citizens and Green Card Holders may be subject to Exit Tax. In this circumstance, the IRS requires covered expatriates to prepare an exit tax calculation and certify prior years’ foreign income and accounts compliance.

When a person is considering leaving the U.S. permanently, there may be exit tax planning issues to consider.

Exit Tax and Expatriation involve certain key issues. These typically include:

• • Renouncing U.S. Citizenship
  • Relinquishing a Green Card
  • Exit Tax
  • Form 8854
  • Covered Expatriates

FAQs

What is U.S. Exit Tax?

U.S. Exit Tax is the IRS method of making individuals who are considered U.S. Citizens or Long-Term Residents to pay a tax upon “Exiting” or “Expatriating” from the U.S.

Is there a U.S. Exit Tax for Green Card Holders?

Yes. 

How much is the Exit Tax?

The amount of Exit Tax due is based on various factors, depending on the type and source of income, it may be immediately taxable or taxed at a future date, once the income becomes distributed and taxable.

How much is the Expatriation Tax?

Expatriation Tax and Exit Tax are the same.

How is Exit Tax Calculated?

If the taxpayer is a Long-Term Resident or Citizen with no exception, the person must verify if they meet one of the three threshold requirements to be considered a “Covered Expatriate.” 

1. Net income tax liability
2. Net worth
3. Unable to certify tax compliance for five prior years.

Then, the person calculates the exit tax based on each specific asset.

Categories of individuals and their reasons for exit tax planning:

Long-Term Residents

For some people, they may have citizenship in a foreign country but are considered Legal Permanent Residents (aka Green Card Holders) in the United States and were never made aware of the true tax consequences of being considered a US person (especially worldwide taxation).

Accidental Americans

The typical example of an Accidental American is an individual who is required to report and pay taxes to the United States although they do not consider themselves as an ‘American’; but their parents are/were US citizens and they may have been born in the United States or outside of the United States to U.S. Citizen parents.

U.S. Citizens/Green Card Holder Turned “Expat”

US citizens who have simply moved outside of the United States 

As a result, the idea of paying continual US tax seems illogical and therefore leads to renouncing their US citizenship.

Key Exit Tax Planning Tips

The following are a few key tips to keep in mind:

• Avoid becoming a legal permanent resident to prevent being subject to exit and expatriate tax.

• Avoid being a long-term resident by being a legal permanent resident for less than 8 out of 15 years; to be classified as a long-term resident, the individual would need to be considered a LPR for 8 out of 15 years.

• When it comes time to abandon the legal permanent resident status, it must be done voluntarily. 

• Reduce their net worth to below $2 million, they will not meet the first net value test. One way to reduce net worth is by gifting accounts, money, and assets. 

Avoid the 5-Year Trap

Be sure to be in tax compliance for the five years prior to expatriation. If you have been out of compliance and prior years you may consider offshore disclosure to get into compliance and anticipation of expatriation.

If you would like to discuss this further, please contact us.

We would like to remind you that the deadline for filing the FBAR form, also known as FinCEN Form 114, for 2019 is October 15th 2020. Please ensure you submit your form online by this due date. You can complete and file the form at

Click Here

The Department of Treasury has powers to levy significant penalties if you do not meet your obligations to file.

On August 28, the IRS announced that it would temporarily allow the use of digital signatures on certain forms that cannot be filed electronically. The agency added several more forms (PDF) to that list.

The IRS made this decision to help protect the health of taxpayers and tax professionals during the COVID-19 pandemic. The change will help to reduce in-person contact and lessen the risk to taxpayers and tax professionals, allowing both groups to work remotely to timely file forms.

The IRS added the following forms to the list of those being accepted digitally:

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

On 23 July 2020, the Treasury Department and the IRS published final regulations under Section 951A providing guidance with respect to the high-tax exception, which excepts certain ‘high-taxed’ income from being otherwise taxed as “Global Intangible Low-Tax Income” (GILTI). The final regulations maintain the same foreign tax rate threshold to be eligible for a high-taxed income exclusion while simultaneously modifying operational rules that may affect a U.S. individual’s decision to pursue the exclusion. In combination with these final regulations, Treasury and the IRS issued new proposed regulations conforming aspects of the Subpart F high-tax exception with the newly finalized GILTI high-tax exception, and providing for a single high-tax exception election under Section 954(b)(4).

Similar to the Subpart F High-Tax Exception, individual and corporate taxpayers may exclude from GILTI certain high-taxed income earned by a CFC. For this purpose, GILTI is deemed to be high-taxed if it is subject to an effective foreign tax rate in excess of 90% of the maximum U.S. corporate income tax rate. With a current U.S. corporate income tax rate of 21%, this equates to an 18.9% threshold for high-taxed income.

As compared to the proposed regulations, the final regulations offer more flexibility by allowing U.S. shareholders to elect into the high-tax exception on an annual basis. Generally, this applies for tax years beginning on or after July 23, 2020. This permits taxpayers to apply the election retroactively to any CFC tax year beginning after December 31, 2017, if they apply the final regulations consistently to each year for which the election is made.

U.S. individuals with interests in CFCs should discuss these changes with their U.S. tax advisors to better understand how to optimise the tax efficiency of their structures under these new regulations.