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Foreign Account Tax Compliance Act

Once upon a time, it used to be not only common, but even easy for Americans to get around paying their fair share of taxes by hiding money in foreign banks. To put a stop to this practice, the United States lawmakers finally passed the Foreign Account Tax Compliance Act (FATCA), which required foreign banks to share financial information with the United States. Before this new law, people could move overseas, buy property and businesses, work, and open up a bank account and feel there were no reporting obligations. Now, the IRS definitely wants to know all about it.

FATCA can certainly bring about an emotional reaction from expats in particular—many may feel that they are unfairly singled out and labeled as tax evaders, simply because they hold accounts and assets abroad. The truth is, FACTA was created in order to find the tax cheats that hide money and assets offshore. Now that it is established, it is very important that individuals with foreign interests do their reporting and filing requirements correctly. For many individuals these new tasks can be daunting.

Our expert San Diego tax attorneys at Dallo Law Group certainly understand. Foreign financial reporting can feel confusing. But, if you know you need to file FATCA, the good news is that you do not need to be left alone in the dark. Our tax lawyers can help you file Form 8938 to meet your FATCA reporting requirements and avoid penalties for non-compliance. Whether you have recently opened a foreign bank account or have been overseas doing business for a number of years, our tax professionals at Dallo Law Group can help you explore what options you have to get your records straight with the IRS.

The IRS developed the Offshore Voluntary Disclosure (OVDP) back in 2009 when it was first referred to as OVDI. The purpose of the initiative is to help taxpayers in the United States disclose previously unreported offshore accounts, assets, investments and income. In 2018, the IRS did away with the OVDP, but updated the traditional voluntary disclosure to expand the offshore reporting procedures.

The main difference to the new OVDP is that there is no deadline. The stipulation is that the IRS demands full cooperation, because if you get caught concealing foreign assets while you are in the program, you will have officially entered deep waters. Also, you need to act quickly, as the IRS has the option to end or adjust OVDP at its discretion, which could mean a change in guidelines or an increase in penalties.

International Business Transactions

One thing you can be guaranteed about is that all countries of the world assess taxes on businesses. However, there are differences in tax systems, tax rates, business incentive provisions, and compliance requirements. It is also important to note, many countries assess tax on its citizens and domestic corporations, regardless of where they earn the income.

The United States government has the authority to levy tax on any income earned by US citizens, residents, and domestic corporations, regardless of where these individuals live or do business and on foreigners doing business within the country. This can lead to double taxation issues, where the taxpayer not only must pay US taxes but also foreign taxes. The taxation rules for these foreign transactions are established by the countries where business is done but also by tax treaties which often lessen the tax burden.

The US offers a foreign tax credit (FTC) for corporations that can be applied to income that is taxable by both the US and the foreign country. Corporations must file Form 1118, Foreign Tax Credit — Corporations to claim the FTC. The FTC can be applied to foreign income and trade taxes, but not to foreign property taxes, value-added taxes, sales taxes or any other levy that is not based on taxable income. However, these other expenses are deductible as business expenses. For individuals, income earned in a foreign country is taxed both by the foreign country and by the US. However, the US government offers a foreign tax credit that can be claimed both by individuals or corporations to offset double taxation. The FTC is allowable for foreign income taxes and other similar taxes and only income taxes qualify for the credit. Finally, the maximum FTC equals the tax on income from foreign sources by the US for any given tax year.

Territorial or Residence-Based Taxation

How a country’s taxation system works determines who is taxed, on what, and how much. With residence-based taxation, a resident of the country is subject to taxation on their worldwide income. Nonresidents are only subject to taxation of income derived from the country. How a country defines a tax resident varies and depends on the nation, though, and sometimes the tax rates differ for residents and nonresidents.

On the other hand, for citizens from countries that employ citizenship-based taxation, a citizen or permanent resident living in any country will be subject to income tax irrespective of where the income was earned. This system is the one we have here in the US and in a nutshell, the only way out of filing annual tax returns in the US, even if you live elsewhere and make money solely outside of the US, is to renounce your citizenship.

The maximum FTC equals the tax on income from foreign sources by the US for any given tax year. The foreign tax deduction is one of the itemized deductions that may be taken by US taxpayers to account for taxes already paid to a foreign government, and are typically classified as withholding tax.

Tax Avoidance

Unlike other types of tax violations, the crime of offshore tax evasion is a very serious tax crime that may result in significant incarceration and monetary fines. Now more than ever, this area has become a top priority for US government enforcement. It is important to note, tax evasion is no longer a civil violation; it is classified as criminal tax evasion and is codified under 26 USC 7201:

“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

One of the most important aspects of determining whether a person is guilty of offshore tax evasion or fraud is the intent of the individual. Dallo Law Group is here to help you disclose your foreign interests and navigate you through timely filings and reporting, but it is never too late to amend numbers. We are specifically equipped with the expertise of foreign business and transactions and can help you avoid any pitfalls to omissions. We can also analyze your previous tax returns to ensure you reported what you needed to and/or begin to get things right for you.