Nov 05, 2017
International Income Tax and Foreign Bank Accounts: A Primer on Avoiding Paul Manafort’s Fate
Nov 05, 2017
By Joseph Manuel
U.S. Citizens, dual citizens, and those holding a U.S. Green Card are subject to worldwide taxation by the US government. If you fall into any of these categories, you must pay tax on income made in the foreign country where you reside or earn income and to the U.S. To help with enforcement, the U.S. requires reporting foreign bank accounts to the IRS. Not doing so can land you in the kind of trouble Paul Manafort is in (well, at least some of the trouble he’s in.)
Fortunately, the worldwide taxation sounds much worse than it really is, as the U.S. tax code allows you to claim a credit or take a deduction for foreign income taxes paid to countries outside of the U.S. Here are a few of the basics for dealing with foreign income, including the reporting requirement.
Credit v. deduction: It is usually to your advantage to claim a credit for foreign taxes rather than to deduct them. A credit reduces your U.S. tax liability. A deduction only reduces your taxable income and can be taken only in the current year. Generally, you cannot deduct some foreign income taxes and take a credit for others.
Foreign tax credits: If you choose to claim a credit for foreign taxes, you must complete IRS Form 1116, Foreign Tax Credit (Individual, Estate, and Trust). Do not include on Form 1116 any foreign taxes paid or accrued as withheld income taxes that are already on your Form 1040.
Limits: The Foreign Tax Credit cannot exceed the same share of your total U.S. tax that your taxable foreign income sources bears to your total taxable income. (This is the short explanation.) And the allowable foreign tax credit cannot be more than your actual foreign tax liability.
Key exclusions for living abroad: If you meet certain requirements, you can exclude up to U.S. $102,100 of your foreign earned income.
Foreign taxes paid on excluded income: You cannot claim a credit for foreign taxes paid on amounts excluded from your gross income under the foregoing foreign earned income exclusion.
Foreign tax credit carryback and carryover: The amount of foreign income tax not allowed as a credit because of the limits can be carried back one year and carried forward ten years as a credit that can be used in those years.
Foreign Bank Account Reporting: Paul Manafort has been indicted by Special Counsel Robert Mueller for failure to report accounts overseas (among other things, which will not be discussed here.) Essentially, he did not report accounts related to business entities he formed outside the U.S. The basic rule is that any United States person that has a financial interest in or signature authority over a foreign financial (bank, securities, or other) account must file an FBAR (Foreign Bank Account Report) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C. section 5321(a) (5). Willful violations may also be subject to criminal penalties under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. section 1001.
Manafort is being accused of willfully failing to file over many years by not telling his attorneys and accountants that he had overseas accounts under his control or signature authority, even after being specifically asked, if the indictment is to be believed. In my opinion, this will be difficult for Manafort to overcome if the allegations are true. Either he filed the FBARs or he did not. If he did not, he will need a reasonable cause for not doing so, which may be tough to provide if the attorneys and accountants asked him directly and there is written proof of his negative response each year.
5322 (a)(b) or (c), the penalties for willful failure to file range from a $250,000 to a $500,000 penalty and up to 10 years in jail. (I won’t touch on the many other allegations and potential penalties in the indictment.)
What does all of this mean? Nowadays there is really nowhere to hide assets or income overseas. Disclose what you are supposed to disclose. This applies to all “United States Persons.” A United States Person means United States citizens (including minor children); United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
Joseph Manuel is a Tax Attorney and CPA, and new member of MCBA. Joseph also runs an international CPA tax practice in Singapore, American Tax Service (Pte. Ltd.).