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The Internal Revenue Services or IRS is a US federal agency that collects taxes and enforces tax laws. IRS officers have several little tricks that help them identify errant taxpayers and hold them accountable for their tax liability. Although it may not appear intimidating at first glance, each of the IRS' methods is directly or indirectly related and helps them identify defaulters. So how does IRS know about foreign income? This is how you are involuntarily helping the IRS track your foreign income:
Apart from the basic, everyday activities, other, more specific situations can alert the IRS to your foreign earned income.
For the IRS, foreign income tracking and locating bank accounts is a significant part of their daily work. There are several different methods through which the federal agency can find foreign bank accounts. The most common ones include:
Under the Foreign Account Tax Compliance Act (FATCA), over 110 foreign countries and 300,000 foreign financial institutions actively report account holder information to the IRS. As such, the IRS does not need to do anything since several small and large foreign financial institutions from FATCA-compliant countries are readily volunteering information.
The IRS is well known for offering rewards to people who provide information about tax evasion and other financial misdemeanours. If a whistle-blower reports you and claims a finder's fee in return for turning in your information, it will not take long for the IRS to track your foreign accounts, and by extension, your foreign-earned income.
The IRS has the right to audit you any time, for any number of reasons. Since the FATCA was introduced and the FBAR penalties were renewed, an IRS audit can prove to be a risky proposition. It becomes worse if you do not provide accurate information, omit, or intentionally misrepresent information. So, if you're being audited, it is best to hand over details of your foreign earned income and bank accounts.
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The first thought you have when you discover unreported IRS foreign income is to panic. Instead, you should focus on rectifying the situation, especially if it was unintentional.
You need to assess your foreign income sources and categorise your income to determine those overseas incomes that went unreported.
Under the US tax regime, long and short term foreign capital gains receive the same treatment as US assets. An asset held for more than 12 months before selling qualifies for long-term capital gains on your US tax returns. The LTCG rules may be different in your country, which may have caused the oversight.
Based on the country in which you have your foreign assets, if you are earning dividends, you may obtain qualified dividends. If you earn foreign interest income, go ahead and report it on your tax return, paying the tax at the ordinary rate.
You can always consult a tax consultant in the USA to get assistance on paying taxes on unreported foreign earned income.
As per US laws, anyone who resides in the US has to report their worldwide income. So whether you are a citizen or an immigrant, you must report your foreign income across all sources, including foreign banks accounts and investments.
Essentially, you should ensure that you comply with FATCA, under which you should compulsorily report all your financial accounts, those held within and outside the US. Remember that if your country is already FATCA-compliant, your information will be sent to the IRS, so it is best to volunteer your data.
You can report your foreign account details by filling Form 8938, which you must submit with your US tax returns, specifically if the accounts' value exceeds $50,000. Understating or not disclosing your foreign earned income can result in you being subjected to a 40% penalty. As per FATCA, you should also report your financial assets not held in custodial accounts like bond certificates or physical stock.
Now that you know how does IRS know about foreign income, ensure you adhere to US tax filing laws. As an NRI, you can benefit from the Double Taxation Avoidance Act, under which you get IRS foreign earned income exclusion, i.e. you can avoid paying double the taxes on the same income. Nonetheless, you should report the income sources while filing your US tax returns. Failing to do so can put you on the radar of the IRS.
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*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.
The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.