Individual tax returns with international issues are tough – don’t go it alone.
If you have been preparing your own taxes for years, you may have a certain level of confidence. With recent changes to tax laws, what you have been doing for years may have completely changed. Nowhere has the change been more pronounced than in the area of international taxes. Not only have the laws changed, but the IRS has more enforcement tools than ever before, and the penalties for non-compliance have never been stronger.
To keep it relatively simple, we are going to give you some examples of what has changed or recently been added to the international tax laws – to highlight that an already complex system has only become even more complex. In the last few years, here are some of the changes:
- Tax Cuts and Jobs Act of 2017 – moving the U.S. to a modified territorial tax system – a huge change in the type of international taxation.
- A new type of tax – Global Intangible Low -Taxed Income or GILTI
- U.S. persons used to be taxed on their foreign income when it was distributed to them. Now, certain U.S. persons are required to report their share of income whether it was distributed to them or not.
- Other changes to certain foreign income that allows the IRS to attribute more ownership and income from foreign corporations to U.S. shareholders, like changing the 10% ownership rule to include value, not just shares, and eliminating the 30-day controlled foreign corporation rule.
- Two more, newer categories of foreign income for foreign tax credit purposes:
- Section 951A income (other than passive income)
- Foreign branch income
Those are just some of the recent changes that make international taxes even more complicated. And the IRS now has many more tools available to enforce international tax issues than they did in the recent past. Here are some highlights:
- Foreign Account Tax Compliance Act or FATCA. FATCA generally requires that foreign financial institutions report to the IRS information about foreign assets held by U.S. taxpayers. Remember “secret” Swiss bank accounts? Not anymore!
- Partnership with Chainalysis, a blockchain analytics firm that helps the IRS track virtual currency (VC) transactions. While VC is not strictly related to international tax, many users of VC hold their currency in offshore digital wallets, and this partnership led to the IRS issuing 10,000 letters to taxpayers in August of 2019 that may, or have under-reported VC transactions.
- Penalties for failure to report, or under-reporting, can be severe. Here is an example of penalties that may be applied: Even if you owe no tax, and do not even have to file Form 1040, you may still need to report certain foreign financial accounts each year on Form 114, Report of Foreign Bank and Financial Accounts; if you fail to report, the IRS can impose penalties of up to $10,000, per account, per year. That sounds bad enough, but if you willfully violate the reporting requirement, the penalties can skyrocket to up to 50% of the value of the account!
- Just in case the IRS does not have your attention yet, beginning in 2019, the following question was added to the Individual Tax Return Form 1040: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? Yes or No.” Remember, you answer this question and sign your tax return under penalties of perjury!
If there is even a hint that you might have some exposure to international tax issues, consulting with a tax professional with expertise in international taxes will save you some time, headaches, and money. Many people do not even realize they may have foreign exposure, so if you have ever lived out of the United States, invested outside of the U.S., or have relatives outside of the U.S., it is worth your time to contact us and let us help you sort through any tax issues you may have.
We have only touched the surface of the pitfalls of international taxes, but we hope it has given you a taste of how amazingly complicated it can be. Sciarabba Walker works with clients with international tax issues regularly and we have the expertise and connections to help you handle such issues. Reach out to your personal Sciarabba Walker contact or email us at firstname.lastname@example.org for more information.
By Cliff Acheson, CPA