The United States is one of a few countries in the world that taxes worldwide income. U.S. citizens and residents have a duty to report and pay taxes on all income, regardless of the country in which it was earned, or where the taxpayer was living at the time. Although the requirements can be tedious, there are various provisions that are meant to avoid double taxation including the foreign earned income exclusion, foreign tax credit, and various totalization agreements that specifically address the social security tax and its foreign equivalents. In addition, the United States has tax treaties and agreements with a number of foreign countries with provisions relating to income generated in that country.
In addition to the requirement to report and pay tax on foreign income, there are requirements to disclose information relating to foreign bank and other financial accounts held in foreign countries. Failure to comply with these requirements can result in severe penalties, often described as Draconian. Additionally, if noncompliance is willful, there is a possibility of criminal liability.
International Filing and Disclosure Requirements
In recent history, there has been an increased focus on enforcing the international filing and disclosure requirements. Part of these efforts included the enactment of the Foreign Account Tax Compliance Act (FATCA), which is one of the foreign account reporting requirements. The FATCA involves information-sharing agreements between the United States and over 100 countries worldwide, with the purpose of enforcing the foreign account reporting requirements. Many countries on the list, like Switzerland and the Cayman Islands, were previously considered safe havens for would-be tax dodgers. The list continues to grow, with very few countries refusing to enter an agreement with the United States.
Voluntary Disclosure Programs
In order to alleviate some of the penalties for taxpayers who have not complied with these requirements, the IRS has offered a series of Voluntary Disclosure Programs that are meant to provide taxpayers an opportunity to disclose their foreign income and accounts under a reduced penalty structure. However, if the IRS finds out about undisclosed foreign accounts or unreported foreign income prior to a taxpayer entering the program, it is no longer an option.
The list of countries and banks which have information-sharing agreements with the United States continues to grow at a rapid pace. It is highly advisable for taxpayers who have not yet come forward to do so now before it is too late.
Contact an Experienced Attorney from the Sacramento Area
If you did not report and/or pay all of your tax returns, including those from foreign accounts, you may face penalties from the IRS. A tax attorney from NewPoint Law Group, LLP, can offer guidance for noncompliant taxpayers, and may even find a way to reduce some of the penalties. To schedule a free consultation, call 800-358-0305 or contact us online today.