If you are a US citizen, a resident alien or if you comply with the requirements of "substantial presence" then any income that you earn in foreign countries may carry a US tax liability. Failure to properly report and pay taxes on that income here in the US could result in the accrual of penalties and interest as well as cause the IRS to charge you with crimes based on the circumstances surrounding your failure to pay. However, it may also be the case that you may not owe additional taxes to the US based on taxes already paid on that income to foreign countries.
Respected tax attorney William D. Hartsock offers answers to these frequently asked questions about foreign tax audits and preparation.
Click on "See Answer" next to any of the questions below to find answers from San Diego's most highly regarded tax attorney.
Do I have to pay taxes in the US for income earned in foreign countries?
San Diego tax attorney William D. Hartsock says: Yes.
US citizens and resident aliens and people that comply with the substantial presence test have to pay tax on worldwide income. They have to pay tax here in the United States for income earned here in the United States and income earned in other countries, less a credit for taxes paid to the other countries. But, this is not double taxation.
Essentially, if you are a US citizen, resident alien or pass meet the requirements of the substantial presence test you pay taxes in the US based on your worldwide income. However, on income earned in foreign countries you must first pay taxes in that country based on the tax rate in that country. Then, any taxes that you paid in that country are applied as a US tax credit toward the income that you earned in that country. Therefore, if you earned the income in a country like Germany where the tax rate is very high, then you will not owe any US taxes based on the income you earned in Germany. However, you will have to provide the IRS a full account for the income earned in Germany and taxes paid to Germany. But, if you have already paid more taxes in Germany that you would have paid on that income in the US, then you will not owe additional taxes on that income to the IRS.
Of course, if you happen to earn money in both the US and in a foreign country where the tax rate is higher than in the US, such as Germany, and you pay more taxes in Germany than you would have paid on that income in the US, your income tax credit will not offset what you owe in the US based on the income earned in the US.
If the situation is that you earned income in a country where the tax rate is less than the US tax rate, then you will have to first pay the income taxes in that country, and apply that amount as a tax credit toward your US tax return, where you will owe taxes in the US based on the difference.
This can be a complex matter and it is recommended that you seek the advice of a qualified tax attorney that is experienced in matters of Foreign Tax Audits & Preparation.
For more information, contact the Law Offices of William D. Hartsock, Esq. (858)481-4844.
How do I report foreign income to the IRS?
San Diego tax attorney William D. Hartsock says: There are numerous tax forms depending on the situation. There are specific forms based on whether you have an international corporation, a foreign trust, foreign bank accounts or foreign assets, and every one of them requires different reporting, including different forms, rules and regulations. What is critical here is an in depth and thorough understanding of the rights, privileges and protections that are available to you under the law. That is something that only a significant amount of experience can properly prepare you for.
This can be a complex matter and it is recommended that you seek the advice of a qualified tax attorney that is experienced in matters of Foreign Tax Audits & Preparation.
Is my tax preparer qualified to prepare foreign taxes?
If they are knowledgeable in foreign tax law in the specific country in question, then they can. However, you really have to understand all of the rules, regulations and the forms. Don't hire someone who is just dabbling into it because it is the new popular thing. Get someone who has at least 7-10 years of experience in international taxes before you trust them to do something like that. This is critically important, because, the penalties are severe for failure to file or failure to pay, they are extreme.
