Minimize international tax filing penalties for missed income
Amending the 1040 Tax Return for Foreign Income and Accounts
Amending the 1040 Tax Return for Foreign Income and Accounts: When a American person at foreign accountsassets, investments and/or income abroad, they are required to declare this information to the IRS on their US tax return (1040) as well as various communication of international information forms. Some common reporting forms include Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, and Form 8938. When a taxpayer does not report this information correctly to the IRS, it may be subject to fines and penalties – although often penalties can be avoided, minimized or mitigated. Let’s go over some basics of the 1040 amendment for reporting offshore income, accounts, and assets.
Does the United States have a tax treaty with the foreign country?
When first determining what the potential tax implications might be for income from a particular foreign country, it is important to consider whether or not there is a tax treaty in place, as this may affect the how certain types of categories of income may be taxed. For example, is there a double taxation agreement that can eliminate tax on certain pension income or possibly an aggregation agreement that can minimize the amount of double taxation required for social security contributions?
What categories of foreign income does the taxpayer have?
Not all different categories of income are taxed the same. For example, some income is taxed at the filer’s progressive tax rate, while other income is taxed at a reduced rate, such as Long-term capital gains (LTCG) and Qualified dividends. Based on a particular tax treaty, there may be an additional reduction of certain taxes.
Have foreign taxes been paid abroad?
When someone needs to amend their 1040 tax return based on foreign income, it is important to determine if that person has already paid foreign taxes on foreign income. If the individual has already paid foreign income taxes, they may be eligible for a foreign tax credit that may offset some or all of the US tax payable.
Were there also accounts and assets?
When the taxpayer needs to amend their U.S. tax return, and particularly when dealing with foreign money, it is important to consider whether or not the taxpayer also needs to report or disclose foreign accounts, assets or investments that were not previously reported on past returns. If so, the taxpayer should consider one of the offshore amnesty programs and avoid the quiet disclosure route.
Options for modifying the 1040 form
The extent needed to change returns will (usually) cover what needs to be reported in the 1040x.
Income and no accounts or assets
Where there are no offshore assets or accounts to consider, there are no international reporting penalties to avoid – and the main issue will be an under-reporting penalty, which the taxpayer can be able to obtain the reduction of the penalty.
Undeclared assets and no income
When the taxpayer has undeclared assets, but no undeclared income, then the main objective is for the taxpayer to avoid offshore penalties by convincing the Internal Revenue Service that since there was no unreported income, it was simply an administrative matter and should not be done l object of penalties. But, with the recent modification of delinquency procedures in November 2020, this has become more difficult than in years past.
Undeclared income and assets
Where a taxpayer has both undeclared income and assets, they will generally need to consider one of the Offshore Tax Amnesty Programs or a Detailed Reasonable Cause Submission in order to safely enter tax compliance. ‘IRS.
Summary of the Offshore Amnesty Program
Offshore amnesty programs are programs developed by the Internal Revenue Service to help taxpayers who are already out of compliance for non-filing.
Some of the more common programs include:
Can I just start filing FBAR this year instead?
No, unless the current year is the first year you had an FBAR reporting requirement. If you had a filing requirement from the previous year, but only start filing the current year (forward filing), this is illegal. In the world of offshore disclosure, it’s called a FBAR Silent Disclosure. The IRS has warned taxpayers that if caught in an FBAR silent disclosure situation, it could result in deliberate penalties and even criminal investigation by the IRS. IRS Special Agents.