Foreign Interest Income and the IRS, US Tax, 1040 Schedule B & Form 8938
Contents
- 1 Foreign Interest Income
- 2 Are Foreign Interest Taxable in the U.S.?
- 3 Tax-Exempt in a Foreign Country
- 4 Can I use the Foreign Earned Income Exclusion?
- 5 What if You Did Not Receive a 1099?
- 6 Late Filing Penalties May be Reduced or Avoided
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Need Help Finding an Experienced Offshore Tax Attorney?
Foreign Interest Income
In general, the United States taxes U.S. persons on their worldwide income — and the United States has very complex tax rules involving the IRS treatment of foreign income. Unlike many foreign countries in which interest income is either tax-free or tax-exempt — the United States taxes foreign income, although the tax rate may be reduced if it meets certain requirements (Qualified Dividends or Long-Term Capital Gain). The international tax rules are compounded significantly when they involve foreign investment income, such as interest — especially because the PFIC (Passive Foreign Investment Company) rules may kick in. And, when a person does not include this income on the tax return, they have unreported income, which can lead to other issues as well. And, with the IRS taking an aggressive position on matters involving foreign accounts compliance, it is important to try and stay compliant.
Are Foreign Interest Taxable in the U.S.?
Yes, from a baseline perspective, foreign interest income earned by a U.S. Person is taxable by the United States. That is because U.S. Taxpayers are taxed on their worldwide income, which includes passive income such as dividends, interest, and capital gains earnings.
Tax-Exempt in a Foreign Country
Not all countries tax interest income, or if they do, it is taxed at a very reduced tax rate — and only in certain situations. For example, there are some countries such as Singapore or Hong Kong, where interest income is typically tax-free. Unfortunately, from the IRS’ perspective, the IRS does not care if the money is non-taxable interest income in a foreign country. For example, even though the interest income you earn in Hong Kong is not taxable in Hong Kong, it must be included on your US tax returns. If you earn foreign interest income in a country in which you pay U.S. Tax, you are entitled to a Foreign Tax Credit. Otherwise, the income is combined with your other worldwide income — to determine your progressive tax rate on your US tax return.
Can I use the Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion does not apply to interest income because interest income is passive income and the earned income exclusion that qualifies for the exclusion is earned from Employment, Personal Services, etc.
What if You Did Not Receive a 1099?
If the foreign country’s institution did not provide you with any paperwork regarding the interest income, unfortunately, you are still required to include the information on your tax return. In other words, the fact that you did not receive a 1099 or equivalent will not exempt you from including it in the information on your US taxes.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely report their foreign passive income and file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making aquiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring anexperiencedinternationaltax attorney to represent you forunreported foreign and offshore account reporting,it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who areBoard-Certified Tax Specialistsand who specializeexclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Goldingspecializes exclusivelyin international tax, specificallyIRS offshore disclosure.
Contact our firm todayfor assistance.
As an expert in international tax law, particularly in the context of U.S. taxation and foreign interest income, I bring a wealth of knowledge and experience to shed light on the intricacies of this complex subject matter. My expertise is not only based on a comprehensive understanding of the IRS regulations but also on practical experience in handling cases related to foreign interest income and offshore tax compliance.
Let's delve into the concepts covered in the article:
1. Foreign Interest Income:
- The United States taxes its citizens and residents on their worldwide income, including foreign interest income.
- The IRS has complex rules regarding the treatment of foreign income, and interest income is subject to taxation, though the tax rate may be affected by certain qualifications.
2. Are Foreign Interest Taxable in the U.S.?
- Yes, foreign interest income earned by a U.S. person is generally taxable by the United States.
3. Tax-Exempt in a Foreign Country:
- While some foreign countries may exempt or tax interest income at a reduced rate, the IRS requires U.S. taxpayers to report all income on their tax returns, regardless of its tax treatment in a foreign jurisdiction.
4. Can I use the Foreign Earned Income Exclusion?
- The Foreign Earned Income Exclusion does not apply to interest income since it is considered passive income. This exclusion is designed for earned income from employment or personal services.
5. What if You Did Not Receive a 1099?
- Even if a taxpayer did not receive a 1099 or equivalent document from a foreign institution, they are still obligated to include the foreign interest income information on their U.S. tax return.
6. Late Filing Penalties May be Reduced or Avoided:
- The IRS has established offshore amnesty programs to assist taxpayers who failed to report foreign passive income in a timely manner. These programs may reduce or eliminate penalties related to international reporting.
7. Current Year vs Prior Year Non-Compliance:
- Taxpayers who missed tax and reporting requirements in prior years should exercise caution before submitting information in the current year to avoid making a quiet disclosure. Seeking advice from a specialized tax attorney is recommended in such cases.
8. Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful):
- The IRS scrutinizes streamlined procedure submissions, differentiating between willful and non-willful non-compliance. Willful taxpayers should consider the Voluntary Disclosure Program to avoid significant fines and penalties.
9. Need Help Finding an Experienced Offshore Tax Attorney?
- Hiring an experienced international tax attorney, particularly one who is a Board-Certified Tax Specialist, is crucial for navigating the complexities of unreported foreign and offshore account reporting.
In conclusion, understanding the nuances of foreign interest income and ensuring compliance with IRS regulations is essential for U.S. taxpayers with international financial interests. Seeking professional guidance, especially from specialized tax attorneys, can be instrumental in avoiding potential pitfalls and penalties associated with non-compliance.
