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IRS Form 8938 Filing Requirements

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IRS Form 8938 (FATCA) Filing Requirements

The “FATCA” (Foreign Account Tax Compliance Act) provisions require specified individuals to report ownership of specified foreign financial assets if the total value exceeds the applicable reporting threshold. The IRS created Form 8938, Statement of Specified Foreign Financial Assets, for this purpose. Form 8938 must be included with the individual’s tax return. Failure to include the Form 8938, if required, could lead to significant penalties. Note that the Form 8938 is also referred to as “FATCA” which can cause confusion since that term also refers to the regulations themselves. Read more

How the IRS Investigates FBAR Violations

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How the IRS Investigates FBAR Violations

In this article are the IRS’ internal procedures for investigations of FBAR violations. After the foreign bank reports the non-compliant taxpayer’s account information to the foreign taxing authority, the information is then provided to the IRS. For those countries without intergovernmental agreements (IGAs), the account holder’s information will be sent directly to the IRS. Or the IRS has discovered the non-compliance based on stated or implied sources of foreign income on filed tax returns or information forms. Regardless of how the IRS obtains the information, what follows next is an investigation by an IRS examiner of the potential FBAR violation(s). Read more

Foreign Bank Account Reporting under the Bank Secrecy Act (FBARs)

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Foreign Bank Account Reporting under the Bank Secrecy Act (FBARs)

If you are a US citizen or tax resident, you may have a foreign bank account reporting obligation. There are individuals who don’t report their foreign financial accounts to evade taxes, but that is an exception and not the norm. For the vast majority of those who fail to report, the reason is that they were simply unaware of their reporting requirements. Read more

Canadian Investments and U.S. Tax Compliance

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Canadian Investments and U.S. Tax Compliance

For Canadians foreign nationals residing in the U.S. and U.S. expatriates living in Canada, taxation of Canadian investments in the U.S. can be complicated. It can even be difficult to find a tax advisor who can properly report these investments. Failure to file one or more of these forms can lead to severe penalties. This article provides a summary of the more commonly found Canadian investments. Read more

Streamlined Domestic vs. Foreign Offshore Procedures

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Streamlined Domestic vs. Foreign Offshore Procedures

Streamlined Domestic vs Streamlined Foreign Offshore Procedures

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to non-U.S. investments. Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS offers Streamlined Filing Compliance Procedures (SFC). These procedures have been in existence since September 2012. However, due to the increase in global economics, the streamlined filing compliance procedures were expanded and modified to accommodate a broader group of U.S. taxpayers.

Previously, the procedures were only available to filers outside the United States. In 2014 the Streamlined Filing Compliance procedures were expanded to provide a means for U.S. taxpayers living in the United States to correct tax non-compliance with respect to non-U.S. investments resulting from non-willful conduct.

Let’s take a look at the requirements, process, and differences between the two programs.

Streamlined Foreign Offshore Procedures (SFOP)

Theses procedures were created for U.S. taxpayers residing outside the United States.

Qualification

(1) U.S. citizen or green card  holders qualify to use the streamlined foreign offshore procedures (SFOP) if:

• In any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual did not have a U.S. abode and

• The individual was physically outside the United States for at least 330 full days.

(2) Individuals who are not U.S. citizens or green card holders may use this procedure if in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) is past, the individual did not meet the substantial presence test of IRC 7701(b)(3).

Note that the following types of “exempt individuals” are not considered to have met the substantial presence test even if they have resided in the U.S. for more than 183 days as calculated under the test. Thus, any days spent in the U.S. while in one of these non-immigration visas do not count towards the substantial presence test.

• An individual temporarily present in the U.S. as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.

• A teacher or trainee temporarily present in the U.S. under a “J” or “Q” visa, who substantially complies with the requirements of the visa.

• A student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa.

• A professional athlete temporarily in the U.S. to compete in a charitable sports event.

Example: Bob, a student from India, comes to the U.S. in 2011 on an F1 visa. In 2014 after graduating with an engineering degree, Bob secures an H1B visa sponsored by his employer. It is now 1/1/2017 and Bob has just found out about foreign asset reporting requirements. Assuming his failure to report these assets was non-willful, Bob qualifies under the SFOP even though he has been physically present in the U.S. since 2011. The reason is that until 2014 he was on an F1 visa and therefore did not meet the substantial presence test for the third “look back” year (2015, 2014, 2013) for which the tax return due date has passed; he was an exempt individual in 2013.

Process

U.S. taxpayers eligible to use these procedures will file delinquent or amended returns, together with all required international information returns (Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621), for the past three years and will file delinquent Report Of Foreign Bank & Financial Accounts (FBAR) (FinCEN Form 114) for the past six years.

Qualified filers must submit the above along with a signed certification statement attesting that the failures above resulted from non-willful conduct.

Streamlined Domestic Offshore Procedures (SDOP)

These procedures were created for U.S. taxpayers residing in the United States.

Qualifications

Individual U.S. taxpayers are eligible to use the Streamlined Filing program if:

• They are a U.S. Resident.

• They have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed.

• They have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset.

• The failures above resulted from non-willful conduct.

Eligible filers will be assessed a Title 26 miscellaneous offshore penalty equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period.

Process

U.S. taxpayers eligible to use these procedures will file amended returns, together with all required information returns (Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621), for the past three years and will file delinquent Report Of Foreign Bank & Financial Accounts (FBAR) (FinCEN Form 114) for the past six years.

Qualified filers must submit the above along with a signed certification statement attesting that the failures above resulted from non-willful conduct.

Streamlined Domestic vs Streamlined Foreign Offshore Procedures

These programs are similar but have some important distinctions:

  1. The streamlined foreign offshore procedures allow taxpayers to file both original and amended tax returns with the application, while the streamlined domestic offshore procedures require the three most recent tax returns to already have been filed. In other words, an original return cannot be filed with the SDOP application. So what if taxpayer did not file one or more of the three most recent tax returns? It’s possible that the taxpayer could quickly file any delinquent tax returns (correctly reporting any foreign income and assets) and then enter into the streamlined program.
  2. The SFOP does not assess the 5% miscellaneous offshore penalty, while the SDOP does.

Sources:

Internal Revenue Manual § 21.8.2.18

Internal Revenue Code § 7701(b)(3)

IRS to Audit Certain OVDP Cases

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IRS to Audit OVDP Opt Out Cases

What’s new for 2017 IRS OVDP?

Each year the IRS rolls out campaigns to identify the the top compliance issues for the year. For each of these campaigns, the IRS will deploy resources, training, and tools, metrics and feedback to enforce compliance in these areas. One of the selected campaigns for 2017 involves the IRS OVDP program.

IRS OVDP Audit Campaign

This campaign will be lead by IRS executive Pamela Drenthe, Director of the International Individual Compliance Practice Area.

Who does this OVDP audit campaign affect?

This campaign addresses applicants who applied for OVDP or requested pre-clearance but either were denied access or withdrew from the program voluntarily.

What will happen if I am in one of the above categories?

If you were rejected from the OVDP program or voluntarily withdrew from the program, the “IRS will address any continued noncompliance through a variety of treatment streams including examination.” (emphasis added)

What should I do if I am potentially affected by this campaign?

If you’re not in compliance, you should immediately hire a legal representative and try to resolve your non-compliance through one of the offshore programs currently available. If your OVDP application was rejected, you’ll need to determine why you received the rejection letter. Voluntary disclosure requires the applicant to truthfully, timely, and completely comply with all provisions of the voluntary disclosure practice. If your application or pre-clearance was rejected, it’s likely due to one of the following reasons:

The application or pre-clearance request was not complete: This is easier to cure. You and your legal representative should determine what information was missing and resubmit.

The application or pre-clearance request was not timely: A request is not timely if the IRS has a pending civil or criminal investigation against you, notified you that it intends to conduct a civil or criminal investigation, or has received information from a 3rd party informing the IRS of your non-compliance. If your application or pre-clearance request was denied for one of these reasons, you’re potentially in a very bad situation. Your legal representative needs to contact the IRS Criminal Investigation Department to determine exactly why the application was denied.

Takeaways

Here are the two key takeaways from this recent focus on rejected and withdrawn OVDP cases:

1. If you decide to apply for pre-clearance or full OVDP, don’t expect to be able to withdraw without potential complications. Withdrawing from the program clearly puts yourself “on the radar” for a potential examination.

2. If your pre-clearance or OVDP application is rejected, find out exactly why and if necessary have your legal representative begin engaging in discussion with the IRS. “Laying low’ and doing nothing is probably the worst thing you can do because the consequences of continued non-compliance will be severe.

The fear of rejection from the OVDP program or pre-clearance should not dissuade anyone from applying when their conduct shows obvious signs of willfulness. In many cases where OVDP applications have been rejected, the IRS has considered a failed entry into the OVDP program to be a mitigating factor in favoring a lesser fine and probation rather than incarceration.


Sources:

“Large Business and International Launches Compliance Campaigns.” Internal Revenue Service, 28-Feb-2017, https://www.irs.gov/businesses/large-business-and-international-launches-compliance-campaigns

United States v. Tenzer, 213 F.3d 34, 42-43 (2d Cir. 2000) (treating as mitigating a defendant’s failed attempt to enter an IRS voluntary disclosure program).

United States v. Zabczuk, 10-60112 (S.D. Fla.) (defendant’s OVDP was rejected and received three years’ probation despite the government’s request for an 18-month sentence).

Recent FBAR Civil Penalty Cases

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Civil FBAR Penalty Cases

An FBAR penalty under 5321(a)(5) requires not just a failure to timely file but also evidence of willfulness.

When willfulness is established, the failure to timely file an FBAR will result in a maximum penalty that is the greater of (1) $100,000 or (2) 50 percent of the maximum balance in the accounts at the time of the violation.

Here are cases where the Government has prosecuted individuals for 5321(a)(5) violations.

U.S. v. Pomerantz

In this filed complaint, the Government is seeking to collect civil FBAR penalties assessed under 31 U.S.C. § 5321(a)(5), also known as the FBAR penalty statute. As discussed in a previous topic, any assessment of civil or criminal penalties under 5321(a)(5) requires evidence of willfulness. Although this case is still in pending litigation, it serves as a good example of fact patterns that can lead to civil FBAR penalties.

Case Facts

  • Defendant Jeffrey Pomerantz (“Pomerantz”) is a U.S. citizen and had an FBAR filing requirement for calendar years 2007, 2008, and 2009
  • Pomerantz had two personal checking accounts at Canada Imperial Bank of Commerce (“CIBC”) which were opened prior to January 1, 2001
  • In 2003 Pomerantz formed a corporation in the Turks and Caicos Islands and retained full rights to act on behalf of the entity
  • The newly formed entity conducted no active business, but was rather a shell entity to hold and manage his personal investments
  • Also in 2003, he opened two portfolio accounts in Switzerland that were titled in his business’s name
  • In 2007 Pomerantz opened an account with the Royal Bank of Canada (“RBC”) also titled under his dba
  • In 2010 the IRS commenced an income tax examination of Mr. Pomerantz’ returns.
  • Prior to the examination, it appears that Pomerantz did not file FBARs for any prior years
  • In 2014 the Government assessed civil FBAR penalties against Pomerantz in the amount of $860,300 due to willful failure to file his 2007, 2008, and 2009 FBARs.

Willfulness Factors

These are some factors that likely caused the government to pursue civil FBAR penalties under 31 U.S.C. § 5321(a)(5):

  1. Creating separate business entities which had no other purpose than to hold and manage his investments
  2. Location of the accounts in jurisdictions that are known tax havens (Turks and Caicos Island, Switzerland)
  3. Opening the foreign accounts using a dba rather than under his own name

It should be noted that he likely did not file any of his FBARs from 2001 onwards, but civil penalties were only assessed for 2007-2009. Presumably he filed in 2010 after being selected for an income tax examination. There is a 6 year statute on an un-filed FBAR that begins to run from the due date of the FBAR. The Government did not assess the penalties until 2014, so there were only three years (2007-2009) for which the statute was still open and the FBAR was not timely filed.

U.S. v. Mani

Here is an FBAR penalty case that resulted in a plea agreement. Link to DOJ press release.

Facts

  • Defendant, March Edward Mani, is a 48 year old U.S. citizen and resident
  • Mani is a plastic surgeon working in Beverly Hills, CA
  • Dr. Mani began to travel to Dubai in 2011 to perform plastic surgery for a foreign medical center
  • Dr. Mani’s accountant, who was aware that he was earning foreign income, informed Dr. Mani in late 2011 that he would be required to report foreign bank accounts under his ownership to the IRS. Defendant reported his 2011 foreign earned income on his 2011 federal income tax return.
  • In 2012 defendant opened a foreign bank account at Mashreq Bank in Dubai, where he deposited income he earned from the Medical Center. By 2013 his account contained $402,000 USD.
  • Defendant then consulted with other accountants whether he had to report foreign earned income and his foreign bank accounts to the IRS. The other accountants confirmed to Defendant that he did indeed have a reporting requirement.
  • Defendant filed his 2012-2014 tax returns, significantly underreporting his foreign earned income from the medical center.
  • Defendant failed to file his FBARs.

Charges

Defendant was charged with a violation of Title 31, USC § 5314 and 5322, and 31 C.F.R. § 1010.350.

The statutory maximum sentence for the above violations is a: five years of imprisonment; a three year period of supervised release; a fine of $250,000 or twice the amount of gross gain or gross loss resulting from the offense, whichever is greater.

The plea agreement can be found here (courtesy of Jack Townsend’s Federal Tax Crimes blog)

Willfulness Factors

The willfulness factors here are easy to spot:

  • There was a significant amount of foreign income that was unreported
  • Defendant had knowledge of the FBAR filing requirements

 

What Should you Do if you have Unfiled FBARs?

Regardless of whether you enter into the OVDP or streamlined program, you’ll need to file your 6 most recent FBARs. This should be the very first thing you do. As a practical matter, the government does not generally assess civil penalties on late FBARs but only on FBARs that have not been filed at the time the noncompliance is discovered.

Offshore Tax Compliance for Investments in India

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FATCA India Compliance for Investments in India

For US residents with investments in India, compliance with FATCA and the US tax code can be burdensome. We’ll discuss the types of Indian investments that we’ve come across in our Streamlined and OVDP cases.

Fixed Deposit Accounts

This is probably the most common type of unreported income in our streamlined cases involving Indian nationals. Those owning “fixed deposit” or savings accounts in India usually have an NRE or NRO account which is available for non-residents of India. Fixed deposit accounts are similar to CDs in the US. Such accounts may be held at any number of Indian banks such as:

  • ICICI Bank
  • HDFC Bank
  • State Bank of India (SBI)
  • Bank of Baroda
  • HSBC Bank
  • Canara Bank
  • Punjab National Bank

Myth: Because the account holder will not receive the interest income until maturity, it is not reported on the US tax return.

Fact: Any interest accrued in such accounts, even if they are not yet distributed, are taxed in the US.

Public Provident Funds (PPF) and Employee Provident Funds (EPF)

A public provident fund (PPF) is a long-term investment option that is backed by the Government of India. A PPF is a public pension system that is similar to the US Social Security system.

Myth: Because these are long-term investments that cannot be withdrawn until maturity (15 years), the income is not taxable in the US. In addition because it exempt from tax under 80C of the Indian tax code, that it is not taxable under the Internal Revenue Code.

Fact: The US does not recognize PPFs as tax-free investments. Therefore the earnings from a PPF are reported each year on the US tax return as they accrue.

Those with investments in PPFs are required to report all interest, dividends, and capital gains, even if they are “reinvestments”, and regardless of whether the account has matured or not. Additionally, the account holder may have a PFIC requirement.

An Employee Provident Fund (EPF) is similar to a PPF, but it’s more like a 401(k) or IRA in the US. An EPF is a fund to which both a salaried employee the and employer may contribute a portion (12%) of the salary as a tax-deferred investment (tax-deferred in India).

Myth: If the account holder does not withdraw any money from an EPF, it is not taxable in the US.

Fact: The only types of employee pensions that can grow tax-free are those that are recognized under Section 401(k) of the Internal Revenue Code. Any income earned in a EPF is reported on the US tax return, regardless of whether there has been a withdrawal.

Life Insurance

Term life insurance plans are not reported on the US tax return or the FBAR. However, if the plan has cash value, such as a Unit Linked Insurance Plan (ULIP), there may be taxable income.

Myth: Life insurance is not taxable until the policy has been surrendered.

Fact: A ULIP is an investment portfolio. Any interest, “bonuses,” or dividends, including reinvestments are taxable. Additionally, you may have a PFIC filing requirement since this is a securities based investment.

Mutual Funds

Any interest, dividends, or capital gains from foreign mutual funds are taxable in the US. Additionally, they are likely also to be subject to the PFIC rules.

Demat Accounts

A demat account (short for dematerialized account) are shares and securities held electronically. These are paper stocks that have been dematerialized into electronic form.

Myth: Because stocks held directly are not reportable on the FBAR, demat accounts are not reported either.

Fact: A demat account is considered a financial account and must be reported on the FBAR.

FBAR, FATCA, and PFIC

In addition to reporting the income from any of the above investments, you may also have a FBAR (finCEN 114), Form 8938 (“FATCA”), and Form 8621 (“PFIC”) filing requirement, depending on the amounts and types of investments.

Foreign Tax Credits and the US-India Tax Treaty

The good news for those with investments in India is that there may be some relief from US taxation in the form of foreign tax credits and/or from the US-India Tax Treaty, especially Article 20 which provides tax relief for periodic payments or annuities. This may exempt certain types of PPF and EPF distributions.

What makes us the best for Reporting Indian Investments?

If you have investments in India and have not accurately reported them in the past, or failed to report them, contact us to help you become FATCA compliant through the various offshore compliance procedures available to you. Indian investment products are complex. We work closely with chartered accountants in India to ensure accurate reporting. We are also in the unique position to provide you with a “one stop” for both your US and Indian tax returns. We work on your US tax returns, and if you also have a filing requirement in India, our chartered accountants in India can prepare your ITR.

Is Quiet Disclosure Ever a Good Option?

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Is Quiet Disclosure Ever a Good Option?

What is a Quiet Disclosure?

In the world of offshore voluntary compliance, a quiet disclosure refers to filing amended returns and paying any related tax and interest for previously unreported offshore income or assets without otherwise notifying the IRS. This is a procedure that is completely outside the offshore voluntary compliance options that are offered by the IRS.

What are the Risks Associated with Quiet Disclosures?

First, anyone with exposure to criminal or civil willfulness penalties should enter into the Offshore Voluntary Disclosure Program. Either a quiet disclosure or a streamlined compliance filing in such a case would be reckless.

When a client is considering quiet disclosure, it’s usually as an alternative to the streamlined domestic offshore procedures (SDOP). If the taxpayer qualifies for the streamlined foreign offshore procedures (SFOP), there’s really no upside to making a quiet disclosure, as there are no penalties under SFOP.

Let’s compare the audit risk under quiet disclosure vs. streamlined domestic offshore procedures. Situation 1: taxpayer fails to file FBARs or to report foreign income for several years. Assume that his failure is non-willful. What would happen in the event of an audit? If it was a quiet disclosure, then the taxpayer would be subject to non-willful FBAR civil penalties that carry a penalty of up to $10,000 per year (unless there is reasonable cause). However, no non-willful FBAR penalties would be assessed if the taxpayer had entered into the streamlined domestic offshore procedures.

Situation 2: Same as the above but assume that during the audit the taxpayer’s non-compliance was found to be civilly willful. Regardless of whether the taxpayer makes a quiet disclosure or enters into the SDOP, there is no protection against civil penalties where there is willfulness. In such an event, the taxpayer would be assessed a civil penalty that is equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for a maximum of 6 years. Such a taxpayer should’ve entered into the OVDP.

Is Quiet Disclosure an Option?

This is a decision that you should be making with your attorney. It involves a careful risk analysis based on the particular facts and circumstances of your case. I have never used quiet disclosure for a client, but theoretically it could be an option in some situations where the 5% miscellaneous offshore penalty might be substantially higher than the non-willful civil penalties.

Tax Guide for Expatriates and Foreign Nationals

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Tax Guide for Expatriates and Foreign Nationals

This is a short tax guide on expat tax that covers taxation of expatriates and foreign nationals. This is a specialized field of tax, and an entire textbook could be written about the topic.

General Rule

The US tax code imposes taxes on worldwide income of all US persons. IRC § 7701(a)(30)(A) defines a US person as a US Citizen or resident. A resident is able to claim the same deductions and personal exemptions as a US citizen.

A non-resident is only taxed on income from US sources and foreign-sourced income that is connected with US trade or business.

What is a Resident?

A resident for US tax purposes is a foreign national who meets one of following tests:

1. Lawful permanent resident test: An individual who holds a green card is considered a resident for tax purposes for the period of time that he was a lawful permanent resident

2. Substantial presence test: An individual that spends at least 31 days during the current calendar year; and the sum of the total number of US presence days in the current year, plus 1/3 of the total US presence days in the preceding year, plus 1/6 of the US days during the second preceding year equals or exceeds 183 days.

Expatriates

As an expatriate working in a foreign country, you may be subject to income tax in both the US and your host country. In order to alleviate double-taxation, the US tax code offers two primary forms of relief – Foreign Earned Income Exclusion and Foreign Tax Credits. There may be an applicable tax treaty between the US and your host country for additional tax relief.

Foreign Earned Income Exclusion

An individual who qualifies for the benefits under IRC § 911 may exclude a portion of foreign earned income and elect to deduct a portion of foreign housing costs incurred. There are implications of claiming both the Foreign Earned Income Exclusion and Foreign Tax Credits, as will be discussed further below.

A taxpayer is a “qualified individual” to claim the benefits of section 911 if:

1. His tax home is in a foreign country; and

2. He meets one of two tests:

a. Bona fide resident test: taxpayer is a US citizen and a bona fide resident of a foreign country for an uninterrupted year that includes an entire tax year; or

b. Physical presence test: taxpayer is a US citizen or US resident alien who is physically present in the foreign country (or countries) for a total of at least 330 days in any 12 consecutive months.

An individual’s tax home is considered to be the location of his regular or principal place of business. Or if he does not have a regular or principal place of business, then his regular place of abode.

Foreign Tax Credit

IRC § 901 allows a US Citizen or resident to claim a credit for foreign income taxes paid or accrued against US tax liability. There is also an option to elect a deduction rather than a credit, but there very few situations where doing so would be more beneficial than a credit.

Most foreign taxes qualify under this section as long as the person is legally liable for the tax under foreign law; for example, property taxes, capital gains tax, wage tax, PAYE tax, etc.

Foreign Earned Income Exclusion (FEIE) vs. Foreign Tax Credits (FTC)

A taxpayer may not claim a credit or deduction for foreign taxes paid or accrued on foreign earned income that was excluded from US gross income under IRC 911. If you qualify for both the FEIE and FTC, it is generally more beneficial to claim both unless you are in a high tax country such as the UK, Netherlands, Norway, China, and other countries where marginal tax rates are higher. It is best to do a calculation using both FEIE and FTC, and FTC alone during your first year abroad to determine which is more beneficial.

Foreign Nationals

Taxation of foreign nationals (i.e., not US Citizen or green card holder) in the US depends first on whether that person is considered a US resident as discussed earlier.

A nonresident who becomes a resident during the tax year files a dual status return. In addition, there are options for nonresidents to elect to be treated as US residents under 7701(b)(4), 6013(g), and 6013(h). These elections won’t be discussed here for the sake of simplicity.

Residents

A US resident is taxed on worldwide income. This means that any foreign income, including wages, investment income, rental income, and business income earned abroad must be reported on the US tax return. Income such as gain on the sale of a foreign property is included, even if it may not be taxable in your home country. Foreign tax credits and tax treaties are available to alleviate some of the effects of double taxation.

Non-residents

A non-resident taxpayer is subject to two tax regimes – one for US source income not effectively connected with a US trade or business, which is taxed at 30% on the gross amount; and the second for net income that is effectively connected with a US trade or business which is taxed at a graduated rate.

US Source Income Not Effectively Connected to a US Trade or Business

A non-resident is taxed on US source income. Here are some general statutory rules:

1. Interest income is sourced based on the residence of the debtor

2. Dividends are based on the residence of the distributing corporation

3. Compensation for services are based on the place of performance

There are also a variety of non-statutory rules that cover severance, pension distributions, alimony, insurance recovery, scholarships, partnership income, and more. And of course, there are numerous exceptions, and exceptions to exceptions, as is with most of the tax code.

US Source Income Effectively Connected to a US Trade or Business

Business income effectively connected to a US trade or business includes:

1. Compensation for personal services performed in the US

2. Profits from the operation of a business in the US

3. Income of a partner from a partnership engaged in a US trade or business

4. Income from real property operated as a business

5. Income from real property held for investment if election is made

6. Income from sale or disposition of US real property interests

7. Income from the sale of business-related capital assets

8. Capital income derived from assets or activities of a US trade or business

Note that trading in stock, securities, or commodities in the US for one’s own account does not constitute engaging in a trade or business.

Again, this was a short summary of an extensive area of taxation. Many important topics were left out such as:

Tax treaties, including dependent personal services

FinCEN filing

No lapse and boomerang rules

Closer connection exception to the substantial presence test

Departure/arrival year rules

Taxation of dual status individuals

Residency elections

Scale down and stacking rules

FTC paid/accrued methods

Issues specific to foreign properties, such as repayment of mortgage and currency exchange gain/loss

FATCA

Passive Foreign Investment Companies

Foreign business entities

Foreign trusts

And many exceptions to the general rules discussed here