One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institutions) in over 110 countries actively report account holder information to the IRS.
It is important to ensure that this form is filed as required, as the penalties are onerous, $25 per day for failing to file a return (minimum $100, maximum $2,500) and $500 per month for knowingly not filing or for gross negligence, to a maximum of $12,000.
Failure to timely disclose foreign financial accounts on an FBAR can result in significant penalties. The IRS can either assess non-willful FBAR penalties in the amount of $10,000 per violation or willful penalties in the amount of $100,000 or 50 percent of the balance of the account(s) at the time of the violation.
An accuracy-related penalty applies if you underpay the tax required to be shown on your return. Underpayment may happen if you don't report all your income or you claim deductions or credits for which you don't qualify.
The IRS will always discover when you're not reporting your income, whether it's immediate or years from now. You'll know when the IRS thinks you've made a mistake in your reporting by receiving a letter in the mail either stating that you're being audited or you owe.
Penalty charges
One of the major consequences of late filing of ITR is that you will have to pay a penalty. Under Section 234F, if you fail to file your ITR within the due date, a late fee of Rs 5,000 will be applicable. However, if your annual income is less than 5 lakh, the late fees would be limited to Rs 1,000.
An International Information Reporting Penalty may apply if you have financial activity from foreign sources and you don't follow tax laws, rules, and regulations. We mail you a notice if you owe a penalty and charge monthly interest until you pay the amount in full.
For the 2022 tax year, the gross income threshold for filing taxes varies depending on your age, filing status, and dependents. Generally, the threshold ranges between $12,550 and $28,500. If your income falls below these amounts, you may not be required to file a tax return.
Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts.
The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2023, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $120,000 per qualifying person. For tax year 2024, the maximum exclusion is $126,500 per person.
The maximum penalty for unreported offshore accounts is still $10,000 per year (regardless of how many accounts were unreported) if the taxpayer can prove the reason for noncompliance was inadvertent or “non-willful” behavior. That's still $10,000 per year for failing to file an FBAR, best case scenario.
The most common penalty is the failure-to-file penalty, which is 5% of the unpaid taxes for each month the return is late, up to a maximum of 25%. However, many US expats owe no US tax due to the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC), so this penalty might not apply.
Per the Bank Secrecy Act, every year you must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts.
American expatriates can significantly reduce their US tax liabilities with the Foreign Earned Income Exclusion (FEIE). For tax year 2024, the FEIE allows up to $126,500 of foreign income exclusion per person, contingent upon meeting specific tests like the physical presence or bona fide residence criteria.
Foreign Tax Credit
If you qualify for the Foreign Tax Credit, the IRS will give you a tax credit equal to at least part of the taxes you paid to a foreign government. In many cases, they will credit you the entire amount you paid in foreign income taxes, removing any possibility of US double taxation.
The IRS receives information from third parties, such as employers and financial institutions. Using an automated system, the Automated Underreporter (AUR) function compares the information reported by third parties to the information reported on your return to identify potential discrepancies.
The IRS may pursue criminal charges if they suspect fraudulent returns. Criminal conduct refers to any act that violates tax laws and regulations. If the IRS determines that there is enough evidence to warrant criminal action, they will refer the case to the Department of Justice for prosecution.
Usually, tax evasion cases on legal-source income start with an audit of the filed tax return. In the audit, the IRS finds errors that the taxpayer knowingly and willingly committed. The error amounts are usually large and occur for several years – showing a pattern of willful evasion.
Recognizing the need to curb black money, a comprehensive law 'The Black Money Act' was introduced in 2015. With the new law, it is now mandatory to disclose foreign assets and income in your income tax return to avoid tax evasion and enhance transparency in cross-border transactions.
If you don't include taxable income on your return, it can lead to penalties and interest. The IRS may charge penalties and interest beginning from the date they think you owe the tax.
However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020, $108,700 for 2021, $112,000 for 2022, and $120,000 for 2023). In addition, you can exclude or deduct certain foreign housing amounts.
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
The standard statute is 3 years, but if there are foreign assets involved or extreme instances of underreporting income or assets, the IRS is within their rights to audit you for up to 6 years. Civil tax fraud, or a failure to file your standard tax forms, means the IRS can audit you indefinitely.
Failure to report and pay your income tax obligations could lead to substantial fines and penalties. If the amounts are high enough, a prison sentence could also be imposed.