International Tax Issues And The IRS

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The United States Government distinguishes foreign persons from citizens of the United States; this is done for a variety of reasons, tax purposes among them. The IRS considers foreign persons as nonresidential alien individuals, foreign corporations, foreign partnerships, foreign trusts, a foreign estate, and any person that is not a U.S. citizen.

Nonresidential aliens' income from U.S. sources is typically subject to U.S. income tax. U.S. source income can be salaries, wages, or any other compensation where services are provided. Business income is considered to be U.S. source income, including interest, rents, and dividends. Other income that could be considered U.S. source income includes sales of real and personal property, pensions, scholarships, and sales of natural resources.

A resident alien's income, in most cases, will be taxed like a U.S. citizen's income. A person is considered to be a dual-status alien when they are both a resident alien and nonresident alien in the same tax year. In determining a dual-status alien's U.S. income tax, many different rules apply. When reporting U.S. tax returns, one must always use U.S. dollars. Income and expenses in foreign currency must be converted to U.S. dollars when filing U.S. tax returns.

According to the IRS, the United States has established income tax treaties with several foreign countries. According to these treaties, residents of another country who may not be citizens of that country pay taxes at a reduced rate. Other circumstances allow them to be exempt on particular items received from the United States on their U.S. income taxes.

It is important to note that these tax treaties only reduce U.S. taxes on residents of foreign countries. United States citizens and residents are taxed on their income regardless of where the source of income comes from; however, a few exceptions to this rule do exist, such as exemption for military personnel deployed to a combat zone.

Some states follow the guidelines set by the United States tax treaties, while others do not. In most cases, the guidelines that are set forth by the tax treaties are reciprocal. In other words, they normally apply to both treaty countries.

The Internal Revenue Service if often required by United States treaty partners to certify that a person is in fact a U.S. resident when claiming certain treaty benefits. Form 6166 is used by the IRS in these situations. Form 6166 is a letter of U.S. residency certification printed by the U.S. Department of Treasury. In order to request Form 6166, one must use form 8802.

American citizens living in a foreign country are still subjected to U.S. Taxation on their income and assets. There are many Americans who keep their money in foreign accounts for convenience, such as students studying abroad, armed forces personnel, or employees working overseas assignments. While these individuals are oftentimes honest, taxpaying citizens, there are those who send their money overseas to avoid taxes. According to the IRS, an estimated 700,000 American taxpayers are hiding assets in foreign bank accounts.

U.S. Tax laws state that if an individual contains more than $10,000 in a foreign account, they must disclose it. If the money is not disclosed, the individual is subject to fines that equate to half of their bank balance, and can face up to 10 years in prison. In the past, individuals could keep their assets a secret without fear of repercussion, but as the IRS began building a stronger presence in foreign countries, the law has begun to be more strictly enforced.