A Professional Glossary for taxpayers in the United States
If you are concerned that the U.S. tax reporting obligation applies to you but are not sure how to find out, what forms to fill out, and what are the exact tax obligations that apply to you? And if you find other manuals confusing and unclear the following guide provided by Mas America will help you get to the bottom of things.
An acronym for the Internal Revenue Service, which is the United tax authority. This authority is responsible for the Federal Government’s tax collection and is responsible for enforcing federal tax legislation in the United States.
Find out more about the IRS in the link.
Reporting obligation vs. tax payment obligation
The U.S. taxation system includes two separate and independent obligations: the reporting obligation and the duty to pay the tax. This means that the obligation to report revenue does not necessarily establish a duty to pay tax. It is possible that a taxpayer will be required to file an annual income tax return, even though he is not liable to pay tax at all.
The obligation to report US income tax is quite broad and applies, provided that certain income thresholds are met:
- American citizens or holders of green cards – even if they do not live in the United States or have never visited it.
- Foreign citizens who have a source of income in the United States.
* These rules also apply to corporations.
Any entity that meets these criteria is owed an annual income tax reporting obligation. The aforementioned indicates that even an Israeli citizen who holds a green card and who has never visited the United States and all of his income is in Israel will be owed in addition to reporting to the Israeli Tax Authority as well as reporting to the American Tax Authority.
Tax reporting times are fixed by law and change according to the identity of the reporting entity. On the other hand, the tax payment obligation is independent and fixed for April of the following year.
Enforcing the duty of reporting as well as enforcing the duty of paying taxes are rigid and strict. Failing to report, reporting inaccurately or non-compliance with the tax payment obligation exposes the taxpayer to additional fines and sanctions.
Annual Tax Reporting
As noted above, any entity – whether a private individual or a foreign corporation – that generates income within the United States must, given compliance with certain income supplements, submit an annual income tax report to the U.S. Tax Authority.
As to the self-employed, the reporting obligation applies to those who earn an income of more than $400. When it comes to employees, the taxation system determines different income thresholds that are required to file a report. The threshold is set according to the personal status of the application ((single / married filing separately / married filing together / recent widower). In general, the method sets higher thresholds for married people who report together, heads of households, recant widowers, defendants over the age of 65 and blind. With all the rest – the method is relatively harsher and sets lower thresholds.
As part of the report, the applicant will include all his income, expenses, profits, deductions and credits. If the applicant is a U.S. citizen or resident, the report refers to worldwide revenues (that is all income, whether generated in a foreign country like Israel or within the United States). As for foreign citizens, the report will list only the income generated within the United States.
Each application will submit the report on a tax form unique to his status:
- Citizen or Green Card Holder – Form 1040
- Foreign Citizen – 1040NR
- Partnership – 1065
- Company – 1120
- Foreign Company – 1120F
The IRS form may include additional forms according to the personal circumstances of the applicant. Due to the existing sanctions for under reporting and due to the heavy tax liabilities, that may be imposed due to the uncalculated filling of the forms, we strongly recommend receiving advice and guidance before submitting the reports.
Other concepts that are important to know
The FBAR (Report of Foreign Bank and Financial Accounts) is an annual report required to be filed by US persons (e.g., US citizens, Green Card holders, corporations, partnerships and limited liability companies) who own or have signatory authority over foreign financial accounts with an aggregate value in excess of $10,000 at any time during the calendar year.
Foreign financial accounts required to be reported on the FBAR include, but are not limited to, bank accounts, securities accounts, brokerage accounts, pensions accounts, and shares in a mutual fund. The due date for filing the FBAR is April 15 of the year immediately following the calendar year being reported with an automatic extension to October 15.
The penalty for failing to properly file the FBAR generally is $10,000 per violation. However, if there is a willful failure to report an account, the penalty may be increased to the greater of $100,000 or half the balance in the account at the time of the violation.
The Foreign Account Tax Compliance Act (FATCA) is a 2010 US federal law that generally requires foreign financial institutions and certain other non-financial foreign entities to identify and report on the foreign assets held by their US account holders or have withholding imposed on certain payments made to them by US payors.
Foreign financial institutions and other foreign entities subject to FATCA generally attempt to identify their US account holders by asking those they suspect are US citizens or Green Card holders to complete and sign an IRS Form W-9.
FATCA also requires certain US citizens and Green Card holders holding financial assets outside the United States to report those assets to the IRS on IRS Form 8938, Statement of Specified Foreign Financial Assets.
A US citizen or Green Card holder living outside the United States is required to file IRS Form 8938 if (i) they are otherwise required to file a US federal income tax return and (ii) the total value of their foreign financial assets is more than $200,000 ($400,000 in the case of a married couple filing a joint return) on the last day of the tax year or more than $300,000 ($600,000 in the case of a married couple filing a joint return) at any time during the year. The penalty for failing to file IRS Form 8938 is $10,000, with additional penalties possible.
The requirement to file IRS Form 8938 is in addition to the requirement to file an FBAR.
IRS Form W-9, Request for Taxpayer Identification Number and Certification, is used by the signer to certify that he, she or it is a US person and to verify his, her or its US taxpayer identification number (e.g., social security number, individual taxpayer identification number (ITIN) or employer identification number (EIN)). A US person includes:
- An individual who is a US citizen, Green Card holder or US tax resident;
- A corporation or partnership created or organized in the United States or under the laws of the United States;
- A US domestic estate; and
- A US domestic trust.
US citizens and Green Card holders are required by US law to report, and possibly pay tax on, their worldwide income, including income from non-US sources, even if they have never lived in the United States. Such US taxpayers generally are also required to report their foreign financial assets on the FBAR or IRS Form 8938 (see FBAR and FATCA above).
Certain such US taxpayers may have failed to file US federal income tax returns and/or FBARs or filed US returns and/or FBARs that were not accurate or complete. The US voluntary disclosure program may allow those US taxpayers to regain compliance with their US tax obligations without being subject to penalties.
For additional information regarding the US voluntary disclosure program, please contact us.
An Individual Taxpayer Identification Number (ITIN) is a nine-digit tax processing number issued by the IRS to non-US citizens who are not eligible to obtain a US social security number.
A non-US citizen who is required to file a US federal tax return, must obtain an ITIN and include the ITIN on the return.
To obtain an ITIN, a non-US citizen must complete IRS Form W-7, IRS Application for Individual Taxpayer Identification Number, and either (i) mail the completed Form, together with documentation substantiating the non-US citizen’s identity and foreign status (for example, an original valid foreign passport or national identification care or a certified copy of such), to the IRS, (ii) present the completed Form and substantiating documentation at an IRS walk-in office or (iii) process the Form and substantiating documentation through an agent authorized by the IRS to accept ITIN applications.
Form 1040, US Individual Income Tax Return, is the US federal income tax return required to be filed by US citizens and Green Card holders.
Included on this return is income earned by the US citizen or Green Card holder from all sources, including non-US sources (for example, salary earned from a non-US employer for work performed outside the United States, interest paid by a non-US bank and dividends paid by a non-US corporation).
In addition, attached to this return may be schedules or forms reporting the taxpayer’s interest in foreign financial assets or foreign companies.
Form 1040-NR, US Nonresident Alien Income Tax Return, is the US federal income tax return required to be filed by a foreign individual (an individual who is not a US citizen, Green Card holder or US tax resident) who is engaged in a trade or business in the United States.
A foreign individual who owns US real estate (either directly or through a partnership or limited liability company treated as a partnership or disregarded entity for US tax purposes) generally will be considered engaged in a US trade or business and, therefore, will be required to file Form 1040-NR.