U.S. Taxpayers Living in California and Elsewhere Must Comply With the Tax Code’s Foreign Account Reporting Requirements

Currently, about seven million United States citizens live overseas.  Since the nation’s tax laws apply to taxpayers regardless of where their income was earned, Americans who live abroad are still required to submit annual tax returns to the Internal Revenue Service.  Although the tax code presently provides for an exclusion of the first $100,800 of an expat’s offshore income, this exclusion is not automatic.  Instead, it must be claimed on an individual’s federal income tax return.

For a U.S. taxpayer who lives abroad to be entitled to the income exclusion, the individual’s tax home must be in another nation and the taxpayer must have ‘‘foreign earned income.”  In addition, the taxpayer must be a U.S. citizen who resided overseas for the entire year, a resident alien who is a citizen or national of a country that has an income tax treaty with the U.S. who resided in a foreign nation for the entire year, or a citizen or alien who was physically present in another nation for at least 330 days during 12 consecutive months.  According to the IRS, a taxpayer’s tax home is typically located in the country where the individual has the strongest economic and family ties.

In addition to overdue income tax bills, expats who fail to comply with the tax code risk other significant penalties.  For example, Americans with an ownership interest in or signature authority over a foreign account with a balance of at least $10,000 at any point during the year must file a Report of Foreign Bank and Financial Accounts or be faced with penalties that can exceed the unreported account balance.

The recently implemented Foreign Account Tax Compliance Act (“FATCA”) has dramatically expanded the reach of the IRS.  Under the law, banking institutions around the globe are now turning over financial data related to accounts owned by U.S. citizens.  Interestingly, whether or not an expat’s bank operates on American soil is reportedly unimportant to the IRS.  In response to the far-reaching FATCA, many overseas banks are reportedly refusing to open new accounts for U.S. citizens.

At this time, the Offshore Voluntary Disclosure Program (“OVDP”) has processed more than 50,000 requests totaling at least $7 billion in unpaid taxes and penalties.  The OVDP levies a 27.5 percent penalty on the highest account balance of each offshore financial asset that a U.S. taxpayer willfully fails to disclose on his or her U.S. federal income tax return. Since the FATCA took effect, that number is likely to increase dramatically as the OVDP compels American citizens who choose not to disclose foreign banking assets held at a foreign financial institution that is publicly identified as being under investigation or cooperating with a U.S. investigation to pay a penalty of one-half of the account’s highest value.

Understanding the U.S. tax code can be daunting.  If you would like to learn more about your international tax obligations, you should contact San Diego tax lawyer William Hartsock through his website.  Mr. Hartsock has more than three decades of experience advising clients throughout Southern California about international and other tax law matters. To discuss your situation with a skillful tax advocate, give Mr. Hartsock a call at (858) 481-4844 today.

Additional Resources:

3 IRS Strikes? FATCA, FBARs, An ‘Abode’ In U.S. Although You Live Abroad, by Robert W. Wood, Forbes

Photo Credit: quicksandala, MorgueFile