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September 26, 2016


Disclosing your foreign income

The IRS is very diligent when it comes to enforcing tax laws. It is particularly concerned that all earnings are reported, and that federal income taxes be paid on all earnings – even money earned outside of the United States. Failing to report international income can result in fines and penalties, as well as criminal charges.

International business owners face increased risks

Many U.S. citizens and residents are originally from foreign countries, or have relatives in foreign countries, and own and operate businesses in their home countries. It may seem that foreign-earned money should only be taxable in the country where it was earned; however, that is not the case.

While U.S. tax liabilities on foreign income may be offset by deductions, the IRS requires individuals to report their worldwide income. Failing to report this foreign business income can create U.S. tax problems.

When business owners come to the realization that foreign income is subject to U.S. tax laws many are unsure what steps to take. After all, they may have many years, or even decades, of unreported foreign income.

While there may be a temptation to sweep foreign income under the rug, that is not a sound approach. If the IRS discovers foreign income it will assess large fines, penalties, interest and possibly even criminal charges, which can result in deportation for those who are not U.S. citizens. As an alternative, the IRS implemented the Offshore Voluntary Disclosure Program in2012.

The Offshore Voluntary Disclosure Program (OVDP)

The OVDP offers a path for those who have violated the law in the past to get current with their taxes by voluntarily disclosing past discrepancies. By doing so, individuals can avoid the income omission from being discovered by the IRS, which could result in criminal charges.

The program first went into affect in January 2012, and came with a side warning that it could be discontinued at any time. However, new modifications were added to the program in July 2014 that could further help taxpayers who need to report foreign income. Like most IRS programs, there are several separate forms that may need to be submitted in order to come into compliance.

Why is the IRS offering this program?

When circumstances arise that cause the IRS to act generous or forgiving toward taxpayers, it often means that it is in their best interest as well. The more business owners participate in voluntary disclosure, the less difficult it will be to find these tax funds in international accounts. At the end of the day, this means collection more revenue.

Contact a tax lawyer for help

Taking the step to disclose information is intimidating, and it is difficult for many taxpayers to take the first step and fully understand their rights, the benefits of voluntary disclosure and the process involved. Hiring a qualified tax lawyer to help you work through the process can help demystify the situation and avoid costly mistakes and/or unfavorable consequences.

Offshore Accounts/International Tax Disputes