Should you file?
The United States is probably the only developed country that taxes, or at least requires filing of a tax return by its citizens and long-term residents (green card holders) on their world-wide income, regardless of where they reside. If one earns more than her/his personal exemption amount of $4,050 (2016), they must file a tax return in order to claim any and all tax deductions or credits that they are entitled to.
What about the credits, deductions and income tax treaties?
It is a wide-spread misconception that because one is entitled to various credits, deductions and exemptions, they need not file as they will not owe any tax.
Q: Why bother?
A: Penalties abound! Prison is also in the scope … remember Al Capone!
IRS can assess tax, interest and penalties on gross income, disallowing your credits, deductions and exemptions. Most of the interest and penalties are calculated as a percentage of the tax due liability.
However, hefty penalties (starting at $10,000) are imposed for not filing some informational returns, that may or may not trigger any tax liability. Most notably, these are the so called FBAR, now FIN CEN 114, Forms 3520, 5471, 8621, 8865, 8858 (reporting your interest in foreign trusts, corporations, funds, partnerships and hybrid entities). Omission to claim tax treaties on Form 8833 also triggers $10,000 penalty. The law behind these forms is complex and they require significant time, effort and knowledge to prepare them correctly.
Q: How is IRS going to catch me?
A: They have your financial account information.
Besides the penalties, IRS has obligated most foreign banks and financial institutions to report to IRS the financial accounts of Americans under FATCA, a U.S. domestic law with extra-territorial effect that imposes 30% withholding tax on payments to persons who refuse to certify under penalty of perjury whether they are or are not Americans. The foreign banks may close the accounts and block amounts to satisfy the 30% charge. Most countries have signed, or are deemed to have signed Inter-governmental agreements with U.S. Treasury (IGAs). Depending on the Model of IGA the 30% withholding tax may not apply, rather an automatic reporting of the account is required.
If you have not reported your accounts or the income from them continue here.
For those of you who diligently filed your previous years U.S. tax returns and reports, USCANTAX offers to prepare your individual income tax returns. If you are interested in obtaining a quote please book your complimentary 15-minute call here.