For nearly 13 years, Partner Jason Morton has helped various taxpayers with foreign tax compliance, including, the Foreign Tax Credit, Foreign Earned Income Exclusions, FATCA, Foreign Bank Account Reporting (FBAR) compliance and defense, IRS Form 8938 reporting (Statement of Foreign Financial Assets), and tax issues for government contract companies doing business abroad.
Foreign Tax Credit.
You can claim a credit for foreign taxes that are imposed on you by a foreign country or U.S. possession. Taken as a deduction, on Schedule A (Form 1040) foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability.
You file a Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession.
The foreign tax laws however are some of the most complex. It is not as simple as just filing the Form 1116.
Here are just a few things to consider:
- Adjustments in determining foreign source income for credit purposes because of certain reduced tax rates in the U.S., e.g., qualified dividends and/or capital gains, including long-term capital gains, collectible gains, unrecaptured section 1250 gains, and section 1231 gains.
- Proper apportionment of interest expenses between U.S. and foreign source income.
- “Some” charitable contributions may be apportioned against foreign source income (most are not).
- There may be a difference in the credit and the foreign amount withheld. That is, the amount of foreign tax that qualifies as a foreign tax credit is not necessarily the amount of tax withheld by the foreign country. If you are entitled to a reduced rate of foreign tax based on an income tax treaty between the United States and a foreign country, only that reduced tax qualifies for the credit.
- A foreign tax credit may not be claimed for taxes on income that you exclude from U.S. gross income.
It is very easy to make a mistake. You are better to have competent and experience counsel by your side.
Denied the Foreign Earned Income Exclusion.
If you are experiencing a denial of your foreign earned income exclusion, you are aware of its benefits – an exclusion from U.S. taxation up to $104,100 (not a small sum).
The basics are:
- Were you a “qualified individual” whose tax home is in a foreign country?
- Were you a citizen of the United States?
- Were you a bona fide resident of a foreign country?
- Did you live in a foreign country for an uninterrupted period of time?
- Or, were you a citizen or resident of the United States who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days?
Those questions and rules may seem straight-forward; however, approval of the exclusion must be to the satisfaction of the Secretary of the Treasury. Disagreement often arises over the interpretation of your bona-fide foreign presence, your foreign tax home, your intentions while working in the foreign country and the timing of your stay. If you have questions generally or your foreign earned income exclusion was denied, give us a call – we are here to help.
Not Filing an IRS Form 8938 With Your Personal Tax Return?
Omitting a Statement of Foreign Financial Assets (Form 8938) from your personal tax return can be an incredibly costly mistake.
You must use Form 8938 to report your specified foreign financial assets if the total aggregate value of all the specified foreign financial assets in which you have an interest is more than the reporting threshold of $50,000. This is a requirement under The Foreign Account Tax Compliance Act (FACTA). And non-disclosure is unlikely to go unnoticed – under FATCA, certain foreign financial institutions and certain other non-financial foreign entities must report the foreign assets held by their U.S. account holders – giving the IRS more ways to discover taxpayers ignoring this obligation.
The Civil Penalties –
If you are required to attach a Form 8938 to your U.S. tax return. If you do not file a complete and accurate Form 8938 by the due date (including extensions), you may be subject to a Failure to File penalty of $10,000.
If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be considered a “Continuing Failure to File” taxpayer. You may then be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.
It doesn’t stop there.
An underpayment of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.
FBAR: Failing to Report Foreign Bank Accounts?
Also, be aware that filing Form 8938 does not relieve you of your annual requirement to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The rules are similar but not the same.
Unlike Form 8938, the FBAR (FinCEN Form 114) is not filed with the IRS. It must be filed directly with the office of Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, separate from the IRS. Omissions here are just as costly, if not more, than failing to file a Form 8938.
For general guidance, see: 8938 and FBAR Comparisons Chart.
It is highly recommended that you do not simply rely on a comparison chart to make your decision. The enforcement is too aggressive and the penalties too stiff to go to alone. You should seek professional advice in this area.
And, what about criminal charges?
Yes, there are criminal penalties too. See, FATCA non-compliance leads to federal fraud and money laundering conviction.
Taxes & Government Contracting
It is rare to find a law firm versed in both tax law and the law of government contracting. Law firm Partner, Jason Morton, received graduate legal education at the George Washington University Law School in Government Contracting – he was the only tax lawyer in his LLM class.
Two (of many) tax-related challenges for companies engaging in government contracting abroad are:
- Is my company doing business abroad with the federal government structured in a way that’s fully compliant and most advantageous under the new Tax Code?
- Am I meeting all my foreign-related tax reporting requirements under the new Tax Code?
We can help you better understand taxes specific to your government procurement dealings. We are here to help.
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