International Tax Return Preparation (U.S. Expats & Foreigners)

An International Tax Accountant for U.S. Expat Taxpayers

International Tax Accountant for U.S. Expat Taxpayers 

When it comes to tax law and preparing tax returns, international tax law is one of the most complicated aspects of getting the tax return done correctly. These days, any accountant can claim to be a specialist in international tax law even when they are not a Board-Certified Tax Law Specialist. The reason why international tax is so complicated is that oftentimes it will require both the preparation of IRS Form 1040 along with one of a multitude of different international information reporting forms depending on which types of foreign assets, investments, and accounts that the taxpayer may owe. Complicating the matter further is the fact that the United States follows a worldwide income tax model for U.S. Citizens, Lawful Permanent Residents, and foreign nationals who meet this Substantial Presence Test. Let’s look at some important facts for expats when it comes to preparing U.S. Tax Returns.

Worldwide Income

The United States taxes US persons on their worldwide income, no matter where they live and where the income is sourced from. This is different than most countries in which they tax their citizens differently depending on whether they reside in the country or in a foreign country. It is also important to note that a US person is different than a US citizen. A US person includes a US citizen, legal permanent resident, or foreign national who meets the substantial presence test, including expats who do not make a treaty election and/or formally expatriate from the U.S.

Worldwide Account and Asset Reporting

In addition to reporting worldwide income on a tax return, US persons also have to include their global assets on a myriad of different international information reporting forms. This is true, even if the assets are acquired after they move outside of the United States.

Foreign Tax Credits (FTC)

Even though a person may have to pay US tax on their worldwide income, they may qualify to apply foreign tax credits to their US tax liability in order to reduce or eliminate their US tax on that income. There is an equation that is used to calculate the credit and while it does not always result in a dollar-for-dollar credit —  it is a great way to reduce tax liability.

*Not all foreign taxes qualify for the foreign tax credit.

Foreign Earned Income Exclusion (FEIE)

When a US person resides outside of the United States and has a different country tax home, they may qualify for the foreign earned income exclusion and foreign housing exclusion.  The taxpayer must meet either the physical presence test or the bona fide residence test. By doing so, the taxpayer can eliminate more than $100,000 of income from their tax return — as well as a portion of their housing.  Another great benefit to the foreign-earned income exclusion is that spouses can each use their own exclusion amount for their income.

A few important tips: while you can use FEIE along with the foreign tax credit together for the same source of income, you cannot double-dip on the same dollar income. In addition, FEIE is used for earned income and not passive income, and general contributions to pensions are not included in the foreign earned income exclusion either.

Totalization Agreement

The foreign-earned income exclusion does not apply to self-employment tax. However, the United States has entered into totalization agreements with about 25 different countries in which the expat would only have to pay into the Social Security system in the country they are residing and not the US — to avoid double payment.  It is important to note that there are only 25 countries that have Totalization Agreements.  For example, there is a Totalization agreement with Australia but New Zealand does not.

Foreign Tax-Free Income

It is important to note that even though foreign income may be tax-free in the country of source (especially with foreign pension contributions), that does not mean it is tax-free in the United States. For example, if a person is earning interest income in a country that does not tax interest income, the expat would still have to include the interest income on their US tax return.  Taxpayers should always check the treaty if one is applicable to see if there is an exception, exclusion, or limitation to the tax rules.

Form 8938 Due Date and Extension

Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then the form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.

Form 3520 Due Date and Extension

Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.

Form 3520-A Due Date and Extension

Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). In order to extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.

Form 5471 Due Date and Extension

Form 5471 is used to report the ownership of certain foreign corporations. The filing date is the same as when a person’s tax return is due — and if the taxpayer files an extension for the underlying tax return, Form 5471 will go on extension as well. In recent years, Form 5471 has become infinitely more complex — so taxpayers should be cognizant of the different filing requirements and plan accordingly.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.