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.