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Thursday, June 1, 2023

It’s Tax Time Again for U.S. Citizens

Don’t think that as a U.S. citizen living, working or investing abroad, you are protected from the strong arm of the U.S. Internal Revenue Service (IRS).

It’s easy to convince yourself by listening to friendly advice from some longtime expats that you do not have to concern yourself with the IRS. They might tell you there is no way the IRS can do anything to you while you are living here. They might tell you that they have been living here for a long time and have had no problems.

They might ask how the IRS can audit you from outside of the United States. Are they going to send an auditor here just for you?

Some of this may be true, but only to a point. For starters, the IRS can do what is called a mail-in audit. Second, no matter how insignificant you may feel your income is, you should beware.

The IRS carefully chooses its audits to set examples for others, not just for the amount of money it thinks it can get. While you are out of the United States, it is a bit difficult for the IRS to do much of anything to you if all of your assets and family members are also outside the country.

The problem arises when you return to the United States on a permanent or temporary basis. You could be faced with having to answer many difficult questions, paying numerous penalties and not being permitted to return to your foreign country of residence.

Living and working outside of the United States can be a great experience. However, you need to be aware of and follow the rules of the U.S. government. To make the best of your time living overseas, it is a good idea to be well informed and avoid being surprised by the long arm of the IRS. Use the rules to your advantage.

A new responsibility you have living in a foreign country is the reporting of bank accounts you have outside of the United States to the U.S. Treasury Department.

If the total value of all your foreign accounts worldwide exceeds $10,000, for even one minute of one day, you must report these accounts.

This includes accounts over which you have signature power and are not directly owned by you.

The form does not carry any tax and is easy to file, but failure to do so is not easy to resolve. The interest or dividends you received during the year must be included on your individual tax return (see U.S. Treasury form TD f 90-22.1).

The filing due date is June 15 or when you file your tax return, whichever comes first.

If you invest in a foreign corporation or start a business corporation of your own, there are some advantages.

One is that you are generally not taxed on the profits until you take the earnings either as a dividend or in the form of a wage. Even then, you may escape tax on the income because of the foreign tax credit or the foreign earned income exclusion.

If you are an officer, director or a more than 10% stockholder of a foreign corporation, you are required to attach an additional set of forms to your tax return. The amount of information you must supply on these forms depends on the amount of ownership in the corporation and your position with the company.

Failure to file this form can result in a variety of fines and penalties in the hundreds of thousands of dollars. The fact that the company is not making a profit does not release you from your responsibility to file this form. Even if you have an inactive corporation for your car, home or other assets, you are required to file this form with your tax return.

In today’s world of computers and Internet, the exchange of information between countries is commonplace. The United States has exchange-of-information treaties with many countries, including Costa Rica.

One of the biggest advantages of living, working and investing in a foreign country, and one of the most misunderstood, is the foreign earned income exclusion.

With this exclusion, you have the potential to deduct up to $85,700 of your earned income from your tax return for each year that you qualify. The most important thing is that the exclusion is for income you earn as a wage earner. This is income you receive as a self-employed person or as an employee for a U.S. or foreign company. This does not include interest, dividends or capital gain income.

For the self-employed, this exclusion does not include the self-employment tax (Social Security). If you are married and if your spouse qualifies, there is also the possibility to exclude up to another $85,700 of earned income. That’s a total of $171,200.

This exclusion is not automatic. The first requirement of the exclusion is that you must file your tax return. The IRS can disqualify you from the exclusion on the basis that you have not filed a return. Then, to make things worse, that income becomes taxable and carries with it penalties that could equal 100% of the original tax.

For more information, call U.S. Tax and Accounting at 288-2201 or, from the United States, (786) 206-9473.



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