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Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 2499
Experience:  Nearly 30 years of varied tax industry exp. Tax Biz owner
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If a person has a bank account in a foreign country. the money

Resolved Question:

If a person has a bank account in a foreign country. the money came from the sale of a piece of property in that country and a tax is paid on the interest earned on that account to the country where the account is held, does he also have to pay tax to the IRS( double taxation)?
Submitted: 1 year ago.
Category: Tax
Expert:  Tax.appeal.168 replied 1 year ago.
Welcome. THANK YOU for choosing Just Answer. My name is XXXXX XXXXX my goal is to help make YOUR life, a little...LESS taxing.

Q: does he also have to pay tax to the IRS( double taxation)?

A: Before I can accurately answer this question, there are several questions that I need to ask you. Those questions are as follows;

1) Is the person a U.S. Citizen?
2) What country is the property that was sold in?
3) The funds in the foreign account, is the amount over $10,000?
Customer: replied 1 year ago.


person is a US citizen I do not wish to divulge the country and the amount is over $10,000

Customer: replied 1 year ago.

what more information?

Expert:  Tax.appeal.168 replied 1 year ago.
Hello again,

As the person is a U.S. citizen they are required to report worldwide income, which means that they are required to report the sale of the property, even if it is in a foreign country. I asked about the other country because...IF the U.S. has tax treaty with that country, there usually are articles in the treaty that addresses the elimination of double taxation and capital gains. Without knowing what the other country is, I cannot tell if there will be double taxation. Since you do not wish to divulge the country, you can google U.S. Tax treaties and see if the U.S. has a tax treaty with that country. If they do not, if you incurred a gain from the sale of the property, you will likely be taxed on that gain amount in the U.S.

As for the amount in the foreign account being over $10,000, this person is required to complete a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Actually this form should have been filed by June 30, 2013. You can refer to the following IRS webpage fore more information relating to the FBAR;

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-%28FBAR%29

Please let me know if I can be of further assistance to you regarding this matter.

Thank you again for using JUST ANSWER.
Customer: replied 1 year ago.

Your information was good. Lets say the Country was New Zealand, could you tell me if the US has a treaty regarding capital gains and double taxation

Expert:  Tax.appeal.168 replied 1 year ago.

There is a tax treaty between the U.S. and New Zealand. Article 6 of the treaty relates to income from real property and Article 22 addresses the elimination of Double Taxation. As you are a citizen of the U.S., any taxes that you paid to New Zealand will be credited back to you on your U.S. tax return. Paragraph 1 section (a) of Article 22 reads as follows;

(a) the United States shall allow to a resident or citizen of the United States or a United States company as a credit against United States tax the income tax paid to New
Zealand by or on behalf of such resident, citizen or company; and

(b) the United States shall also allow to a United States company owning at least 10 percent of the voting stock of a company (other than a United States company) which
is a resident of New Zealand and from which the United States company receives dividends, as a credit against United States tax, the income tax paid to New Zealand by or on behalf of the distributing company with respect to the profits out of which the dividends are paid.

Full link to treaty;

http://www.irs.gov/pub/irs-trty/newzld.pdf


----------------------------------------------
To claim a credit for the foreign taxes paid, you will need to complete a Form 1116 (Foreign Tax Credit).
Link to Form 1116/instructions:
http://www.irs.gov/pub/irs-pdf/f1116.pdf
http://www.irs.gov/pub/irs-pdf/i1116.pdf
Customer: replied 1 year ago.

If I understand you correctly you are saying that if new zealand has a lower tax rate on savings the Us gov"t will give you a credit for the tax you paid to new zealand and then turn around and tax you at a possible higher rate of the US tax, is that correct?

Expert:  Tax.appeal.168 replied 1 year ago.
I think we're talking about two different matters. From your last response, it sounds as if you are asking about whether the interest is going to be double taxed and not the gain amount. My previous responses were in relation to the possible gain amount from the sale being taxed and not the interest on the money that is sitting in the bank. As for the interest, Article 11 of the treaty relates to interest income. It reads as follows;

1. Interest derived and beneficially owned by a resident of a Contracting State may be taxed in that State.

2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 percent of the gross amount of the interest. The competent authorities of the Contracting States shall endeavor to settle the mode of
application of this limitation.

To answer your question, yes, even if the tax that you paid in the foreign country is lower, you will be credited for the tax paid in that foreign country (if you complete the Form 1116) and will be taxed at the applicable tax rate in the U.S. You do not have a choice as to which country to pay tax to. Again, as a U.S. citizen, you are taxed on your worldwide income accordingly, that income includes foreign interest paid to you.

---------------------------------

To report the interest earned from the foreign bank account, you must first convert the amount to U.S. dollars, and then you will report that amount on the Schedule B of the Form 1040.

Link to Schedule B/instructions:

http://www.irs.gov/pub/irs-pdf/f1040sb.pdf

Customer: replied 1 year ago.


I never knew this. I have had this bank for many many years, am I in some kind of tax trouble

Expert:  Tax.appeal.168 replied 1 year ago.
Are you saying that you were not aware that as a U.S. citizen you are required to report your worldwide income, and complete the FBAR? You will likely have to pay some penalties for not reporting the interest and not completing the FBAR. Typically to be in compliance, the IRS requires the last 6 years of tax returns. You can amend your tax returns for the last 6 years to include the foreign earned interest. As for the financial report, in addition to the FBAR, depending upon the value of the account, you may also be required to complete a Form 8938. I'm looking over that form not to see what the minimum threshold value is to be required to complete that form. For FBAR assistance, you can refer to the following info;

FBAR Assistance

Help in completing Form TD F 90-22.1 (PDF) is available Monday - Friday, 8 a.m. to 4:30 p.m. Eastern Time, at(NNN) NNN-NNNN(toll-free inside the U.S.) or(NNN) NNN-NNNN(not toll-free, for callers outside the U.S.). The form is available online at IRS.gov and Financial Crimes Enforcement Network Website or by telephone at(NNN) NNN-NNNN Questions regarding the FBAR can be sent to FBARquestions@irs.gov.

 

I'll get back with you regarding the Form 8938.

Expert:  Tax.appeal.168 replied 1 year ago.

As for the Form 8938, the following applies if you are an unmarried filer;

If you are not married, you satisfy the reporting threshold only if the total value of your
specified foreign financial assets is more than $200,000 on the last day of
the tax year or more than $300,000 at any time during the tax year.

You can refer to the the instructions for the form 8938 for more detailed information regarding the minimum threshold amounts to file the form;

http://www.irs.gov/pub/irs-pdf/i8938.pdf
------------------------------------------------
My apologies, but I need to leave the computer now. If you require additional information, I will respond in the a.m.
Customer: replied 1 year ago.


I understand you need to leave for now, but I still would like some clarification and your response can be later in the AM that is fine.


 


Now, when you said that typically the IRS would go back the last 6 years if i were to amend the situation and pay the interest earned on that account to the US as well, in addition to some possible penalties, is that the standard way of amending the situation whether or not I choose to voluntarily inform them of the account OR if they were to find out about it on their own? Or would I be subject to additional penalties, even criminal, if I were to just say wait until they were to find out about it themselves.


 


I fully intend to fix this situation myself, just would like to know if theres any difference in penalties and consequences if I let them know or if they were the ones to find out.

Expert:  Tax.appeal.168 replied 1 year ago.

 

 

If I wasn't clear in my previous response, what I meant to convey was that in order for a taxpayer to be in compliance, the IRS requires the last 6 years of returns and 7 years of FBARS to be filed. Since you already filed your returns, I am assuming that you have filed the returns, this means that you should amend the last 6 years of returns.

 

-------------------------------------------------------

 

In brief, the answer is YES, it is better to voluntarily disclose. SEE BELOW:

 



Following is why you should voluntarily disclose;

Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution. The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available under the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC § 6038D). I suggest that you read over the reference source, as it will provide more detailed information relating to the matter.

REFERENCE SOURCE:

http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

-----------------------------------------

Following is a Forbes articles relating to the FBAR Voluntary disclsoure Program. I think it will be beneficial for you to read it.

http://www.forbes.com/sites/irswatch/2013/06/12/irs-fbar-voluntary-disclosure-program-taxpayer-interviews/

Hopefully this clarifies matters for you.

Please remember to positively rate my answer. This is how I receive credit for assisting you.

 

Thank you again for using JUST ANSWER.

Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 2499
Experience: Nearly 30 years of varied tax industry exp. Tax Biz owner
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