Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Reporting Foreign Income: Four Common Misconceptions

The U.S. government has stringent reporting requirements when it comes to foreign assets and income, but many people are still not coming into compliance based on some mistaken beliefs. Here are four common misconceptions regarding foreign income and asset reporting:

#1: The income I earn in foreign countries is not taxable

All U.S. citizens and resident aliens are required to report their worldwide income on their U.S. income, estate and gift tax returns. In many cases, you may claim the benefits of a tax treaty between the United States and the country in which your foreign income is earned. You must, however, reported all foreign income on your U.S. tax return(s) and it is certainly subject to tax.

#2: If I complete the foreign reporting forms I will be audited

Foreign reporting forms must be completed and filed as required by law, and compliance will not necessarily lead to an audit. Even if you are audited, if all of your tax affairs are in order it is generally fairly easy and straightforward to handle any questions or issues raised by the Internal Revenue Service.

#3: I don’t need to report my foreign life insurance, retirement, and other non-traditional financial accounts on my FBAR

You must file an FBAR if the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the calendar year - even if it is for a single day and even if the account produces no income. Financial accounts that must be reported include all of the following:

  • Checking, savings and passbook accounts
  • Securities and other investment accounts
  • Certificates of deposit
  • Mutual funds and similar pooled funds
  • Accounts with a broker-dealer for futures and options transactions
  • Insurance and annuity policies with a cash value

There are few exceptions to FBAR reporting, which are listed in the FBAR line item filing instructions. These exceptions include, but are not limited to: entities named in a consolidated FBAR filed by a greater than 50% owner and participants in tax-qualified retirement plans as described in 26 U.S. Code § 401(a) and 26 U.S. Code §§ 403(a) or (b).

#4: I don’t need to file an FBAR since the foreign account is not in my name

If you are the owner of record or the holder of legal title to a foreign financial account, you are generally required to file an FBAR. With few exceptions, you must also file if you have “signature or other authority” over a foreign account.

U.S. tax preparation and tax law firm

The Moskowitz, LLP tax preparation team works with numerous individuals and companies on their annual returns and reporting, and also helps those who haven’t reported anything in many years to come into compliance. If you have a foreign account and/or foreign income, note that penalties for reporting noncompliance are extremely harsh and simply not worth the risk. Contact our San Francisco office for assistance.

Can the IRS Revoke Your Passport?

Executive Order 13769, President Trump’s notorious travel ban that caused mass confusion and chaos in airports throughout the country, is being revamped following multiple federal court challenges. That travel ban, however, is not the only government action that aims to restrict human mobility to or from the United States.

U.S. citizens are also potential targets of government travel restrictions. In our February 9, 2016 blog post entitled "New IRS Collection Powers Extend to Passport Revocation," we noted how Section 32101 of President Obama’s Fixing America's Surface Transportation (FAST) Act gave power to the IRS to revoke the passports of individuals with seriously delinquent tax debt. That section has since been formally codified in the Internal Revenue Code.

Revocation or denial of passport in case of certain tax delinquencies

Under 26 U.S. Code § 7345, if you have more than $50,000 in seriously delinquent tax debt, the IRS has the power to have the U.S. Secretary of State revoke your passport (or refuse to issue one). Note that the original debt may have been far less than the $50,000 threshold amount, because that figure includes interest and penalties. Note that the amount is indexed yearly for inflation (see IRC § 7345(f)).

Before your passport can be revoked or denied, the IRS must first filed a notice of tax lien under IRC § 6323 or initiate a levy pursuant to IRC § 6331.

Tax debt excluded from § 7345

Some kinds of tax debt may not lead to passport revocation or denial, such as:

  • Tax debt that is being timely paid pursuant to an installment agreement (IRC § 6059)
  • Tax debt that is being timely paid under an accepted Offer in Compromise or settlement agreement (IRC § 7122)
  • Tax debt that has been suspended following a request for innocent spouse relief (IRC § 6015)
  • The taxpayer is awaiting a timely requested due process hearing before a levy to collect a tax debt (IRC § 6330)

Removing certification and passport restrictions

You generally have 90 days from the date the IRS sends its certification of the tax debt to the State Department to make full payment of your tax debt or enter into an alternate payment arrangement that is acceptable to the IRS.

To resolve errors with the IRS certification during this time period:

  • If you already paid the amount due, you can send proof of payment to the address indicated on Notice CP 508C.
  • If you recently filed a tax return and are owed a refund, the IRS should apply that refund to your tax debt; if it is sufficient to fully pay the amount due, the IRS should remove its certification with the State Department.
  • You may also file a lawsuit in a U.S. District Court or with the U.S. Tax Court. You do not have to contact the IRS or file an administrative claim before filing suit.

When you resolve your tax issue, the IRS should remove or reverse its certification with the State Department within 30 days.

Experienced tax attorneys and litigators

Whenever you disagree with an IRS assessment, we recommend having an experienced tax attorney resolve the matter for you, rather than you doing it yourself.  The tax team at Moskowitz, LLP can help. Call our San Francisco office today.