International Tax News

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.

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.

When a U.S. person receives certain gifts or bequests from foreign corporations, those amounts may be considered as part of the U.S. person’s gross income under US International Tax regulations. The Internal Revenue Code’s regulations specifically state that when a “purported gift or bequest” is received “directly or indirectly,” the amount is included in the U.S. person’s gross income “as if it were a distribution from the foreign corporation” (1).

Certain events, such as when a U.S. taxpayer receives a gift from a foreign person, trigger an international tax filing requirement. This event triggers the requirement to file form 3520. In general, the Form 3520 is merely an informational return, as foreign gifts typically do not result in tax consequences for the taxpayer. However, there are some significant penalties for failing to file a Form 3520 in connection with a foreign gift (1).

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.

If you are a U.S. citizen or resident but you paid taxes to a foreign country, you may also be subject to international tax by the U.S. on that same income. However, in some cases, you may be able to take a foreign tax credit or itemized deduction on your U.S. tax return for those taxes already paid to the foreign country. The IRS allows you to take this foreign tax credit to prevent you from being double taxed on your foreign source income.

Foreign corporations engaged in business in the United States must comply with particular record-keeping and international tax reporting obligations under the Internal Revenue Code. The code sections pertaining to foreign-owned domestic corporations and businesses also apply to U.S. taxpayers who engage in business with these companies. These rules are enumerated under IRC §§ 6038A and 6038C, which were enacted in the 1980s and later strengthened and expanded throughout the 1990s.

The IRS has instated some very aggressive rules to force Foreign Financial Institutions and Non-Financial Foreign Entities to enter into FATCA agreements and fully comply with new strict reporting requirements on the assets and financial accounts of US persons.

As a U.S. citizen or U.S. resident, you subject to US international tax law on your worldwide income even if you do not reside in the U.S. However, the IRS provides certain deductions and credits to U.S. taxpayers who live abroad. If you qualify for the Foreign Earned Income Exclusion, you may be able to exclude a portion of your foreign income from your taxable income. You may also qualify for the foreign housing exclusion or the foreign housing deduction.

The Internal Revenue Code places certain limitations on the taxpayer’s ability to present foreign-based documentation during tax litigation. These rules exists so that taxpayers who fail to produce certain items during audit procedures cannot rely upon those unproduced documents at a later date. While undergoing an audit, it is important to gain awareness of these rules and how they can impact a future tax litigation strategy.