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International Tax News
Reporting by Foreign Entities on Financial Accounts of U.S. Persons
In 2010, Congress enacted a series of international tax laws designed to require foreign financial institutions (FFI) and other nonfinancial foreign entities (NFFEs) to provide information about accounts and interests held by U.S. persons. These regulations generally apply to payments made after 2010 (1).
A taxpayer’s residency classification is a threshold issue for determining the applicability of U.S. taxation in international tax issues. We will consider the U.S. tax jurisdiction on “domestic” taxpayers. Generally, United States citizens, United States residents, and domestic corporations are subject to tax on their worldwide income. Nonresident alien individuals and foreign corporations are typically subject to U.S. taxation only on specified items or types of income.
One of the least desirable situations a person can find themselves in is unexpectedly on the wrong side of international tax law. Unfortunately, many US Citizens living, working and/or earning money abroad, along with Greencard holders, resident aliens and non-resident aliens often find themselves in this very predicament. Here we will explore a high level overview of the circumstances wherein a person fitting one of these descriptions may find themselves owing taxes.
If you are not a U.S. citizen, you may be considered as a nonresident alien or a resident alien for tax purposes depending on the outcome of the green card test or the substantial presence test. If you do pass the substantial presence test, then you will be required to comply with applicable US and international tax laws including filing a US tax return and submitting an FBAR.
Sometimes, the IRS may use a John Doe summons to obtain information about the taxpayer whose international tax liability it is trying to determine. A John Doe summons is used when the IRS believes tax is owed, but does not know the exact identity of the individual who owes the taxes.
Depending on whether you are a U.S. Citizen or Resident, you have various reporting and disclosure requirements to the IRS on your U.S. source and worldwide income. In this article we will take a look at a few of the most common and most important international tax reporting requirements.
If you meet the conditions of the substantial presence test, you are considered to be a U.S. resident for U.S. tax purposes. If you qualify as a U.S. resident under the substantial presence test, you may be able to have your nonresident spouse treated as a U.S. resident for international tax purposes even if your spouse does not qualify under the substantial presence test (1).
Over the past few years, the IRS has instituted aggressive rules to force Foreign Financial Institutions (FFIs) and Non-Financial Foreign Entities (NFFEs) to enter into FATCA (Foreign Account Tax Compliance Act) agreements which require compliance with strict reporting requirements on the assets and financial accounts of all US taxpayers. Owners of offshore accounts, thinking their assets are safe, might be at risk of heavy penalties.
If you have a U.S. Green Card, you are considered a U.S. resident for tax purposes. Accordingly, you are a lawful permanent resident and are subject to U.S. tax, even on worldwide income.
The streamlined procedures have a different set of requirements depending on whether the taxpayer currently resides within or outside of the United States. If you are eligible to use the Streamlined Foreign Offshore Procedures, then you must follow particular steps. If you fail to properly comply with the steps, then your application will be rejected for the streamlined procedures. Instead, your tax return will simply be processed in the usual manner and you will not be able to avail yourself of any of the benefits of the streamlined foreign offshore procedures.