Foreign Tax Compliance Question

Question

I am writing to seek guidance on my tax compliance situation as a non-immigrant from a foreign country A(where there is no tax-treaty with USA) who came to the USA in mid-2019 on a working visa. In 2019, I filed my tax return (1040 form) as a resident alien, having qualified under the substantial presence test due to my stay in the USA. However, at the end of 2019, I left my job and returned to my home country. I then joined and worked for the company another country B (where there is tax-treaty with USA) for 2020 and 2021. I filed the tax returns in country B for 2020 and 2021. I didn’t have to file tax returns for the years 2020 and 2021 since I did not earn any income in the US during those periods. Upon returning to the US in 2022 on a non-immigrant visa, I filed my 2022 tax returns (1040 form) as married filed jointly, maintaining my status as a resident alien for tax purposes. However, I recently discovered the requirement to report foreign bank accounts if the aggregate balance exceeds $10,000. Unfortunately, I overlooked reporting income earned from savings accounts in country A and interest income on the savings account in Country B.

I have a few queries regarding my current situation:

• Tax Compliance Options: What are my available options to ensure tax compliance? Is it necessary to amend my 2022 tax returns to include the interest income and disclose foreign bank accounts in country A and B? In country A, interest income is taxable and bank withholds taxes from my account automatically. So, interest income is already taxed in country A, my home country. The money that’s I’ve in foreign countries is not from the income from USA. Do I need to amend 2019 returns too?
• FBAR Filing: Given my oversight in reporting foreign bank accounts for the previous year, should I file delinquent FBAR for the year 2022 before initiating the process for the current year? My savings total is a little over $10K.
• Streamlined Foreign Offshore Procedure(SFOP) - looking at the IRS website, it seems I am eligible for this process as well. According to them, it requires me to file or amend last 3 years returns and 6 years of FBAR. For the past 3 years tax returns, do I need to file it for 2020 and 2021 when I was not in the USA and no US source income? For 6 years of FBAR, do I really need to go back so far or can I just fill it for 2022 only? I appreciate your expertise in this matter and any advice you can provide to help me navigate these requirements.

Answer 1

For years you are a US tax resident (2019, 2022, and going forward until/unless you leave again) you must report, and compute tax on, your worldwide income -- all income from everywhere except items specifically excluded in the Internal Revenue Code like inheritances and gifts, muni bond interest, gain on sale of principal residence up to a limit, forgiveness of student loan due to public service, some allowances and combat-zone pay for military, etc.

If some of your income, normally foreign income, is also subject to foreign income tax -- owed and paid, and not to a country sanctioned by the US -- you can get a credit that reduces your US tax by the amount of that foreign tax up to (but not exceeding) the amount of your US tax attributed to that income. See overview here and form 1116 and its instructions (linked there) and publication 514 (also linked there). Unless you qualify for the de minimis method (under $300 single or $600 MFJ), the computations for this credit are complicated and I strongly recommend using software or a preparer (who uses software); unless you qualify for things like VITA or FreeFile you may need to pay for this, in which case you need to decide if it's worth it.

Note you disclose foreign accounts (i.e. assets rather than income) on the tax return, using form 8938, only above a threshold significantly higher than the FBAR threshold of $10k. See this very handy comparison. Since you say you were only a little over $10k you probably aren't hit by 8938.

I think you're correct that you're eligible for the streamlined process (which grew out of the original 'voluntary disclosure' program) as 'offshore' (non-resident) for 2020 and 2021 within the 3-year window (or 2021 if you wait until after April 15 and don't have an extension). While I'm not personally familiar with this, I would say both tax returns and FBARs for 2020 and 2021 were not required in the first place and thus cannot be either delinquent or amended. (corrected) I would expect you need to file FBARs for 2019 and 2022, and (then) amend the return for 2022. And of course you now need to file both for 2023 but can get until Oct. to do so (file 4868 for the tax return and pay if needed -- "an extension to file is not an extension to pay", FBAR extension is automatic).