Taxpayers with Foreign Income and Assets
Taxpayers with Foreign Income and Assets We are pleased to have a guest blogger for this week. Artur Arciuch is a very active and helpful member of our private Facebook…
June 6th, 2022
The U.S. Department of State’s Bureau of Consular Affairs estimates that nearly 9 million U.S. citizens currently live abroad. Do you have clients included in this statistic? Americans living abroad are subject to special tax regulations imposed by the IRS, making it important to understand your client’s filing requirements. The basics, qualifications, required information, and extension options all need to be fully understood by tax professionals to accurately serve clients living abroad and to remain compliant with taxing authorities.
The June 15 deadline is a special deadline allowed for Americans living abroad. Instead of remitting the individual tax return by the April 15 deadline, these citizens are granted an automatic 2-month extension to file the return. No additional form needs to be filed to request the 2-month extension; however, the return must include an explanatory statement described later. Because this is a filing extension and not a payment extension, your client must still pay any tax you estimate to be due by April 15.
Your clients living abroad may choose to take advantage of the June 15 deadline even if they have no reportable income. Certain tax benefits can only be claimed by filing a U.S. return, such as the foreign earned income exclusion and foreign tax credit. However, clients with a home base in the U.S. should file an individual tax return regardless of if the income is attributable to the U.S. Additionally, due to treaty agreements, some clients may be subject to U.S. income taxes despite living abroad, making it important to understand their situation and when the extended June 15 deadline applies.
According to the IRS, the following groups of Americans qualify for the 2-month automatic extension:
U.S. citizens and resident aliens are permitted to file until June 15, provided that they have a tax home in a foreign country and their abode is in a foreign country. Nonresident aliens also qualify for the June filing deadline if they earned no wages subject to U.S federal withholding. Because taxes were still due on April 18, interest on any unpaid balances accrues from that date.
The information needed on the individual return remains the same for those filing by April 15 and the June 15 deadline. Your client will still be required to report all income and tax items; however, you may be required to allocate which income is foreign-sourced when you prepare the return. This allocation is significant if they lived in the U.S. and another country during the tax year. Moreover, depending on your client’s situation, they may be required to file additional forms, such as:
When the automatic June 15 extension is used, supplemental information is required. According to Publication 54, if you file your client’s tax return between April 15 and June 15, their return should include a statement explaining how one of the following qualifications was met:
Supporting your client’s filing after April 15 with no extension already in place mitigates late filing penalties and interest. Remember that paper remittances of individual tax returns need to be sent to a different location for the June 15 deadline, making it essential to research your clients’ filing requirements as a tax professional.
Like many domestic clients, some clients living abroad may find the April 15 deadline a challenge, perhaps due to pass-through business income and Schedules K-1 arriving late, among other reasons. As a result, there are some additional options to extend beyond the June 15 deadline already afforded to Americans living abroad.
You can request an automatic 6-month extension by filing Form 4868 for clients living in other countries. This will give you an additional 6 months from the April 15 deadline or another 4 months from the June 15 deadline to file those clients’ tax returns. Form 4868 can be e-filed or paper-filed with an extension payment.
In addition to the 6-month extension, you can request another 2-month discretionary extension for clients if the request is made before the extended due date. If approved, this request pushes the required filing date to December 15. However, your client must pay any expected tax by the April due date to avoid interest and penalties. A letter explaining the reason for the discretionary extension must be sent to the IRS at its Austin, Texas, campus. The IRS will not respond to the extension request unless it denies the request. Also, the IRS will not approve the 2-month discretionary extension if your client has already received an approved extension of time to meet residency tests using Form 2350, Application of Time To File U.S. Income Tax Return.
Tax professionals with clients living abroad or on active military duty need to understand the basics, qualifications, filing requirements, and extension options to reduce the risk of incorrect remittances. However, the June 15 deadline isn’t the only regulation imposed by the IRS that tax professionals need to follow for American clients living abroad. International taxation is a complex subject to which many Americans living within and outside of the United States’ borders are subject, making it important to realize when regulations affect your clients.
The University of Illinois Tax School understands that international taxation requirements are a tricky topic, which is why we’ve decided to tackle this issue in our 2022 Federal Tax Workbook at the November Fall Tax School. Situations that result in double taxation for U.S. citizens and permanent residents living abroad, tax-saving strategies to avoid this issue, and many other real-life applications will be covered. Sign up for email notifications to be alerted when 2022 Fall Tax School registration opens in July.
IRS. “U.S. Citizens and Resident Aliens Abroad.” IRS, 10 March 2022, https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad. Accessed 29 May 2022.
U.S. Department of State’s Bureau of Consular Affairs. “Consular Affairs By The Numbers.” U.S. Department of State’s Bureau of Consular Affairs, January 2020, https://travel.state.gov/content/dam/travel/CA-By-the-Number-2020.pdf. Accessed 29 May 2022.
By John W. Richmann, EA, MBA
Tax Materials Specialist, U. of I. Tax School
Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact firstname.lastname@example.org if you have more up-to-date, supported information and we will create an addendum.
University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.
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