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foreign tax credits

Foreign Tax Credits

The foreign tax credit provisions (Internal Revenue code §§ 901-909) are among some of the most important for individual and corporate taxpayers in the international tax arena. These tax credits are used in the outbound transactions, where U.S. taxpayers are earning income abroad. If, for example, a U.S. taxpayer earns income in Mexico, that income is taxable in the United States and may be taxable in Mexico as well.

Who is Affected by International Tax?

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.

audits involving offshore accounts piggy bank on top of foreign currencies

Audits Involving Offshore Accounts

Offshore bank accounts have long been a path for US citizens to hide income and assets from creditors including the IRS. Recent actions by the US Department of Justice have given rise to exchange of banking information between foreign banks and the IRS, making it much more likely that the IRS will eventually find out about foreign bank accounts regardless of whether or not they are reported through the FBAR or tax returns.

How to Bring a Foreign Bank Account Into Compliance

Do you have a foreign bank account that may have international tax implications? If so, it is absolutely critical that you fully understand that US tax law states all US persons (that is citizens, resident aliens and anyone who meets the substantial presence test) file an FBAR to make the IRS aware of any foreign bank accounts that you have interest in or authority over.

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