Here’s what HIVE AI had to say about “Do I need to report income from foreign countries?”:
Yes, as a U.S. citizen or resident alien, you are required to report income from all worldwide sources on your U.S. tax return, regardless of where you live or where the income is earned.
Worldwide Income Reporting Requirement
If you’re a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it’s exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). IRS – Publication 525: Taxable and Nontaxable Income
U.S. citizens are subject to Federal reporting requirements and taxation on their worldwide income as set forth in the Code. Dawson U.S. Tax Court Opinions: Estate of Travis L. Sanders, Deceased, Thomas S. Hogan, Jr., Personal Representative, Petitioner and The Government of the United States Virgin Islands, Intervenor This principle has been established in U.S. tax law for nearly a century.
If you are a U.S. citizen or resident alien, you must report all income from worldwide sources on your tax return unless it is exempt by U.S. law. This applies to earned income (such as wages) as well as unearned income (such as interest, dividends, and capital gains). IRS – Publication 516: U.S. Government Civilian Employees Stationed Abroad
Types of Foreign Income That Must Be Reported
You must report all types of foreign income, including:
- Wages and salaries from foreign employers
- Self-employment income from foreign businesses
- Interest from foreign bank accounts
- Dividends from foreign corporations
- Rental income from foreign properties
- Capital gains from foreign investments
- Foreign pensions and retirement distributions
- Royalties from foreign sources
During taxable years 2003 through 2011 petitioners received foreign-source pension income, interest income, and ordinary dividends. For each of those years they paid Italian income tax. Petitioners filed joint Forms 1040, U.S. Individual Income Tax Return, for taxable years 2003 through 2010. On those returns petitioners failed to report portions of their foreign-source pension income, interest income, and ordinary dividends. Dawson U.S. Tax Court Opinions: John K. Crandall & Nives M. Crandall This Tax Court case illustrates that failing to report foreign income can lead to tax issues.
Foreign Earned Income Exclusion
Section 911(a) provides in relevant part that a qualified individual may elect to exclude his or her foreign earned income from gross income. Section 911(b)(1)(A) defines the phrase “foreign earned income” as “the amount received by such individual from sources within a foreign country which constitute earned income attributable to services performed by such individual”. Dawson U.S. Tax Court Opinions: John H. Thompson & Melanie Salyers Thompson
If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. IRS – Publication 525: Taxable and Nontaxable Income
To qualify for this exclusion, you must meet specific requirements:
The term “qualified individual” means an individual whose tax home is in a foreign country and who is– (A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or (B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period. Thus, a taxpayer must both (1) maintain a tax home in a foreign country and (2) either (a) establish a bona fide residency for an entire taxable year or (b) be present in a foreign country during at least 330 full days in a 12-month period. Dawson U.S. Tax Court Opinions: John H. Thompson & Melanie Salyers Thompson
Foreign Bank Account Reporting Requirements
In addition to reporting foreign income on your tax return, you may have additional reporting requirements for foreign financial accounts:
The Form 1040, U.S. Individual Income Tax Return, currently includes at the bottom of Schedule B, Interest and Ordinary Dividends, the following question: “At any time during [the taxable year] did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?” A taxpayer who checks the “yes” box is directed to instructions concerning his obligation “to file Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority.” Dawson U.S. Tax Court Opinions: Whistleblower 22716-13W
Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts. In most cases, affected taxpayers need to complete and attach Schedule B (Form 1040), Interest and Ordinary Dividends, to their tax return. Part III of Schedule B asks about the existence of foreign accounts such as bank and securities accounts and usually requires U.S. citizens to report the country in which each account is located. IRS Newsroom – IR-2023-35
In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details. IRS Newsroom – IR-2023-35
Further, separate from reporting specified foreign financial assets on their tax return, U.S. persons with an interest in or signature or other authority over foreign financial accounts where the aggregate value exceeded $10,000 at any time during 2022 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Because of this threshold, the IRS encourages U.S. persons with foreign assets, even relatively small ones, to check if this filing requirement applies to them. IRS Newsroom – IR-2023-35
Foreign Tax Credits and Deductions
If you pay taxes to a foreign country on your foreign income, you may be eligible for a foreign tax credit or deduction to avoid double taxation:
You must report your worldwide income on the return. If you paid a foreign tax on the income earned abroad, you may be able to either deduct this tax as an itemized deduction or claim it as a credit against your U.S. income tax. However, if you pay the tax due after the regular due date, interest will be charged from the regular due date until the date the tax is paid. IRS – Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad
Section 6689 provides a strong incentive for taxpayers to comply with their self-reporting obligations under section 905(c)(1), imposing an assessable penalty up to 25% of the deficiency for failure to provide the notice required by section 905(c)(1) unless it is shown that such failure is due to reasonable cause and not due to willful neglect. With exceptions not relevant here, the taxpayer is supposed to notify the Secretary by filing an amended return. An individual taxpayer is instructed to include with her amended return a revised Form 1116, Foreign Tax Credit, and information sufficient to enable the IRS to redetermine her U.S. tax Dawson U.S. Tax Court Opinions: Panagiota Pam Sotiropoulos
Consequences of Not Reporting Foreign Income
Failing to report foreign income can lead to serious consequences:
In 2011 or 2012 petitioners retained counsel to facilitate their entry into the Internal Revenue Service (IRS) Offshore Voluntary Disclosure Program (OVDP). The IRS Criminal Investigation Division (CID) maintains a longstanding practice of voluntary disclosure whereby taxpayers can generally avoid criminal prosecution by timely and completely disclosing their noncompliance to CID. In March 2009 the IRS launched the OVDP, a “counterpart” to this practice whereby taxpayers who timely disclosed ownership of unreported foreign bank accounts were eligible for reduced monetary penalties. Dawson U.S. Tax Court Opinions: John K. Crandall & Nives M. Crandall Dawson U.S. Tax Court Opinions: John K. Crandall & Nives M. Crandall
The penalties for failing to report foreign income and accounts can include:
- Accuracy-related penalties
- Failure-to-file penalties
- Failure-to-pay penalties
- Civil fraud penalties
- Criminal prosecution in cases of willful non-compliance
- Substantial penalties for failing to file required information returns about foreign accounts and assets
Special Situations
U.S. Government Employees Abroad
Employees of the U.S. Government are not entitled to the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction under section 911 because foreign earned income does not include amounts paid by the U.S. Government to you as an employee. In the following two situations, your pay is from the U.S. Government and does not qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. U.S. agency reimbursed by foreign country. If you are a U.S. Government employee paid by a U.S. agency to perform services in a foreign country, your pay is from the U.S. Government and does not qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. IRS – Publication 516: U.S. Government Civilian Employees Stationed Abroad
Nonresident Aliens
If you are a nonresident alien, your income from sources outside the United States is not subject to U.S. tax. IRS – Publication 516: U.S. Government Civilian Employees Stationed Abroad
A nonresident alien not otherwise engaged in a U.S. trade or business is not required to report U.S. source income that was withheld properly at the source or any foreign source income that is not effectively connected with a U.S. trade or business, but may file to claim a refund for overpaid taxes. Generally, income received from U.S. payers constitutes U.S. source income. Income received from foreign payers may also constitute U.S. source income in certain circumstances, such as income received for services performed in the U.S. or income received for the use of intangibles in the U.S. IRS IRM 3.21.3 Individual Income Tax Returns
Conclusion
As a U.S. citizen or resident alien, you must report your worldwide income on your U.S. tax return, regardless of where you live or where the income is earned. This includes all types of income from foreign sources, such as wages, interest, dividends, rental income, and capital gains. Depending on your situation, you may be eligible for the foreign earned income exclusion or foreign tax credits to reduce or eliminate U.S. tax on foreign income.
Additionally, you may have separate reporting requirements for foreign financial accounts and assets, such as filing an FBAR (FinCEN Form 114) or Form 8938. Failing to comply with these reporting requirements can result in significant penalties.
If you have foreign income or financial accounts, it’s advisable to consult with a tax professional who specializes in international tax matters to ensure you meet all your U.S. tax obligations.
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