Does Your Small Business Owe Income from Foreign Sources?

U.S. citizens are taxed on income regardless of whether they live inside or outside the country’s boundaries

Many U.S. citizens earn money from foreign sources. But unless it is exempt under federal law, taxpayers sometimes forget that they have to report all such income on their tax returns. As such, some U.S. taxpayers living abroad have failed to file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs) in a timely manner. Some of these taxpayers have recently become aware of their filing requirements and want to comply with the law.

Effective Sept. 1, 2012, taxpayers who are low compliance risks can get current with their tax requirements without facing penalties or additional enforcement action. These taxpayers generally have simple tax returns and owe $1,500 or less in tax for any of the covered years.
U.S. citizens are taxed on their income regardless of whether they live inside or outside the United States. The foreign income rule also applies regardless of whether the person receives a Form W-2, Wage and Tax Statement, or Form 1099.

Foreign source income includes earned and unearned income, such as wages and tips, interest, dividends, capital gains, pensions, rents and royalties.

But there is some good news. Citizens living outside the United States may be able to exclude up to $95,100 of their 2012 foreign source earned income if they meet certain requirements. This will increase to $97,600 in 2013. If you’re married and you and your spouse both work abroad and meet either the bona fide residence test or the physical presence test, each of you can choose the foreign earned income exclusion. Together, you can exclude as much as $190,200 for the 2012 tax year.