Preparing U.S. Employees Abroad for FATCA, FBAR and More

It is important for U.S. individuals for tax purposes (U.S. Citizens, Green Card Holders, Visa Holders) who are living and working overseas to understand the tax ramifications of being a U.S. person employed outside of the United States. This is especially true for C-level executives who, in addition to earning significant income, will accumulate foreign accounts and assets in the foreign countries where they live and work. That is because owning foreign assets and generating foreign income can require filing several different international information reporting forms that were not previously needed when living in the United States without foreign income, accounts, and assets. Beyond an equalization agreement with their employer, the taxpayer may also be required to file international reporting forms such as the FBAR, Form 8938, and Form 8621. Let’s examine some of the common issues for U.S. Person C-level executives living and working overseas.

First, Who is a U.S. Person for Tax Purposes?

From a U.S. tax component, individuals who are considered U.S. persons for tax purposes are taxed on their worldwide income. There are generally three categories of individuals who may become subject to U.S. tax: U.S. citizens, lawful permanent residents, and foreign nationals who meet the substantial presence test. While various exceptions, exclusions, and limitations may apply from a baseline perspective, if an individual falls into one of these three categories, they may become subject to tax on their worldwide income.

Worldwide Income and Reporting

The United States follows a worldwide income tax model for individuals who qualify as a U.S. person for tax purposes. Therefore, if an individual falls into the three categories identified above, then the default position is that they are taxed on their worldwide income. This is the case, even if the taxpayer lives and works overseas, pays foreign taxes, or has an equalization agreement with their employer, and the employer is paying the taxes for them. In general, an equalization agreement cannot be used to circumvent the worldwide income tax rules, so this is something that taxpayers should be cognizant of before they accept an assignment overseas. While the taxpayer may otherwise qualify for the foreign earned income exclusion or foreign tax credits, typically based on the specific tax equalization agreement the taxpayers entered into with the employer, this can impact their ability to claim certain deductions and credits.

Tax Equalization Agreement Pitfalls

The main purpose of a tax equalization agreement is to ensure that if a U.S. person goes on a foreign assignment, they remain in a tax-neutral position. In other words, the taxpayer does not receive any benefits or detriments for accepting an assignment overseas. This can work for or against the taxpayer. One key problem with the tax equalization is that it doesn’t safeguard the taxpayer to ensure they go through all the international reporting components of being a US person living overseas. Oftentimes, the employer makes it seem that once the taxpayer enters into the tax equalization agreement, the internal or contracted accounting firm will take care of the requirements, but this is not always the case.

For example, the taxpayer may have additional income generated from passive sources outside of the United States, they may have various reporting requirements such as the FBAR and Form 8938 — and the failure to follow these forms may result in significant fines and penalties. Therefore, taxpayers who are living and working overseas should be aware of all the different requirements they have, even if they have already entered into a tax equalization agreement with their employer, and the employer is taking care of the tax requirements, because ultimately the taxpayer is on the hook for ensuring the reporting requirements are met.

Passive Income

While the tax equalization will account for the distinction between working in the United States and working overseas from an employment-based income scenario, it generally does not take into consideration other types of income, such as passive income. It is important to note that many C-level executives and other executives on foreign assignment may, in addition to having earned income may also have a significant amount of passive income, foreign tax credits, carry forwards, etc., which are not being taken into consideration when the employer prepares the hypothetical tax. The hypo tax is based on employment-based income. Therefore, it is important for the taxpayer to discuss their specific and individual tailored needs with the employer providing the tax equalization services.

Foreign Account and Asset Reporting

One of the biggest complications involving tax utilization is that the companies do not provide sufficient information and guidance for the individual with respect to international information reporting. Especially for taxpayers who find themselves on a longer foreign assignment, they may accumulate a significant amount of foreign accounts, assets, and investments. The IRS has developed several different international reporting forms depending on the specific category of asset, as well as the total aggregate value of the assets. Noting that the different forms have different threshold reporting requirements based on the specific category of assets. In addition, the forms may have different filing dates as well as different mechanisms for filing an extension.

This becomes infinitely more complicated when the taxpayer has other family members living overseas, and they may be generating passive income together. However, the relative is not employed by the company where the taxpayer is employed, and therefore is not receiving tax equalization services. The family members may receive a better benefit by just filing as foreign residents and claiming the foreign earned income exclusion or foreign tax credits.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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 a quiet 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 an experienced international tax attorney to represent you for unreported 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 are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.