Foreign Income Must Be Reported

US citizens who generate income from overseas entities must report that income and pay US taxes on it. Tax treaties between the US and foreign countries may reduce tax liability, but failure to fully report foreign income to the US government is fraud.

The IRS Whistleblower Reward program not only rewards those who report criminal tax activity; it also pays whistleblowers who report underpayment. For example, a US citizen who gains income from a business in Liechtenstein must report that income on his or her tax return and pay the proper amount of taxes. Even though the money came from another country, US citizens must still pay taxes on it. A whistleblower can report the taxpayer for failing to report the income from Liechtenstein without having to ascertain whether or not the taxpayer had criminal intent to hide the income. Underpayment reports of a particular minimum size qualify for a possible whistleblower program reward.

Those with foreign bank or investment accounts must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Service in addition to reporting worldwide income. Failure to issue a correct FBAR can result in serious consequences.

The IRS defines "US citizen" as any of the following: a citizen or resident of the United States, a partnership created in or organized in the United States or under the law of the United States or of any state, a corporation created in or organized in the United States or under the law of the United States or of any state, any estate or trust other than a foreign estate or trust, or any other person that is not a foreign person.

Tax treaties may reduce federal tax liablity on certain kinds of income generated overseas. States may or may not honor US tax treaties with foreign countries, so residency in a particular state may mean that full state taxes are owed for a particular overseas income stream. Taxpayers who want to claim a reduction in tax liability must check the tax treaty for the particular country involved to see if it allows for a reduction.

The IRS encourages whistleblowers to report those who either hide foreign income or fail to report foreign investment accounts. Tax underpayments, providing the amount in dispute exceeds $2 million, can result in a reward for a successful whistleblower.