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International Tax

Foreign Bank Reporting – IRS Voluntary Disclosure

If you have an offshore bank account and have not submitted the necessary documents for taxation by the IRS, you may have a problem. The IRS does not smile upon holders of foreign bank accounts that do not pay taxes to the US government. However, the IRS does offer a way out for many taxpayers that either forgot to tell the IRS about their accounts or were hiding money abroad. I have many Clients that are the owners of several foreign accounts and had to go through the process of showing them to the IRS for taxation, so I know enough about this that I can say it is a little unnerving. I wrote this article to help prevent other foreign account holders from being prosecuted for civil penalties or even criminal charges from failing to disclose their accounts. So, without further ado, here are the five things to know about the 2012 IRS offshore voluntary disclosure program.

Number 1: This program is essentially a financial amnesty plan.
This program is set up as a way for the US government to collect taxes from those with foreign accounts and avoid the cost of putting them in prison. It is a financial boon to the government to offer tax amnesty rather than imprisoning people because if they owe taxes then they will not be able to work behind bars and this will reduce the likelihood of the government getting its taxes back. Wealthy individuals with foreign accounts should heed this plan if they have not already disclosed their accounts.
Number 2: Civil penalties for noncompliance are severe.
If you fail to submit an FBAR form reporting your foreign accounts if you have had at any time 10,000 dollars or more in combined money within foreign banks, the IRS will fine you heavily. The fine system currently in place will take either 100,000 dollars or 50% of the money in the foreign bank accounts, whichever is greater. It pays to keep your paperwork together.
Number 3: Prison time is a possibility as well.
Failing to submit an FBAR can end up costing you ten years in prison and 500,000 dollars. Tax evasion can be up to five years and 250,000 dollars as well. Even just filling out a false tax return can net you three years in prison and a 250,000 dollar fine as well. Do your taxes right even if you do not have the skills of a DC tax attorney.
Number 4: The IRS wants to work with you.
It is not in their best interest to put you in prison because it is likely that you have a job and will not continue to make money inside prison. If your accounts are small enough in size then it is likely that you will actually be a financial liability to the government rather than a net plus. They do not want to imprison you if they can avoid it so make sure that you fill out the proper forms and they will likely work with you.
Number 5: Even if you cannot pay all the taxes and interest that was accrued, do it anyway.
Sometimes the interest that has collected on tax debt is so great that it cannot be fully paid. However, it is till in your best personal interest to file an FBAR and talk to the IRS. If you cannot pay the fines and interest in full then they will demand to see if you are really in a state of financial hardship. If you are, then the IRS will work out a payment plan with you.

Working Overseas?

DC Foreign Income Exclusion Attorney

It is very common for residents of the Washington, D.C. metro area to be offered assignments overseas by their employers. If you do except an assignment overseas, make sure you pay attention to the tax consequences of your working in another country. Though the IRS taxes its citizens on their worldwide income, you may exclude approximately $100,000 in income from your taxes. In addition, you may be able to exclude amounts paid for overseas housing costs. The idea behind the exclusion being that you should not be taxed twice by two countries on your income. There are two basic ways to qualify for the foreign earned income exclusion.

Physical Presence Test:

Paris-2-150x150The basic rule you need to know is that you must spend 330 days in a foreign country to qualify for the exclusion. That 330 day requirement does not have to be in a calendar year, and often taxpayers qualify in two years, however the exclusion must be prorated for the days that fall in the calendar year. Be very careful with how and where you spend your free days to make sure you do not spend more than 35 days in the United States. Often taxpayers qualify by the number of days method, then are able to convert to the more relaxed Bona Fide Residence Test, which does not require the counting of days.

As a sound business practice, most financial advisors, consultants and Tax Attorneys recommend that the tax be paid as income is earned. This avoids the business owner from having to shell out a large sum at the end of the year, in addition to having to pay underpayment penalties.

Bona Fide Residence:

To qualify as a bonafide resident of your foreign country, you must reside in the country for a continuous period that included an entire year. Even though your domicile is the USA, where you intend to return, you still are considered a resident of your foreign country. As previously mentioned, many taxpayers use this test in year two, because you must have lived in the country for the entire year. Taxpayers must fill out IRS Form 2555 and attached it to their return in order the claim the exclusion.

Consult an Attorney:

Working overseas tax-free is a complex area of law requiring planning by a D.C. Tax Attorney familiar with the foreign income exclusion. Many, many other issues which include, moving expenses, estimated taxes, withholding, social security taxes state taxes, bank accounts, spouses and self employment tax need to be examined. I have seen many taxpayers either fill out the forms incorrectly or fail to do the proper planning resulting in double taxation. Don’t let this happen to you, contact our District of Columbia Tax Attorney office today!


Non-Citizens (1040 NR)

You will be taxed as if you were a Citizen (Resident Alien) filing Form 1040 if you are a permanent resident (Green Card Holder) or you were present in the United States for 183 days for the three year period counting all the days in 2011, 1/3 of the days in 2010 and 1/6 the days in 2009.

Tax Tip – Certain individuals may be exempt from the 183 day requirement, for example, if you were here on a Student Visa (F, J, M or Q) or you can show the IRS that you have a closer connection to a foreign country than the U.S.

As distinguished from Resident Aliens who are taxed on their worldwide income, Non-Resident Aliens are taxed only on their U.S. Source Income (by filing Form 1040NR). Many itemized deductions are allowed, though the Standard Deduction of $5,800 is not allowed.

Tax Tip– Non Resident Aliens may be able to deduct their moving expenses to the U.S. provided they work for at least 39 weeks during the 12 month period after the move.

Non-Citizens should reference the specific Tax Treaties with their respective Countries, which will further delineate rules on residency, deductions and the tax treatment of income.