IRS foreign tax credit compliance issues are a literal maze of complexity. As explained in the first part of this two-part examination, a foreign tax credit with the IRS is designed to reduce your tax liability if you are required to pay taxes on income in both the United States and a foreign country. The problem is even the IRS admits that the “foreign tax credit laws are complex.” In particular, the IRS foreign tax credit compliance issues are a web of requirements and regulations that simply overwhelm the average taxpayer.
IRS Foreign Tax Credit Compliance Issues
The goal of the international tax team at LSL CPAs is to make sure that the foreign tax credit compliance issues do not overwhelm you. Rather than becoming lost in the maze of foreign tax credit compliance issues, we strongly recommend that you work with an international tax professional. If an accountant does not have experience and expertise in foreign tax credit compliance issues, they might make mistakes that could prove costly for you in the future.
Let us provide you with some examples of the twists and the turns in the maze of foreign tax credit compliance issues.
Complexity Of IRS Foreign Tax Credit Compliance
IRS Foreign Tax Credit Compliance Issues include the following and this list is taken directly from the IRS website and the italics imply a direct quotation. The only difference is the IRS uses bullet points while we choose to employ a numbered list for your benefit:
- Foreign sourced qualified dividends and/or capital gains (including long-term capital gains, collectible gains, unrecaptured section 1250 gains, and section 1231 gains) that are taxed in the U.S. at a reduced tax rate must be adjusted in determining foreign source income on Form 1116, line 1a.
- Interest expense must be apportioned between U.S. and foreign source income.
- Charitable contributions are not apportioned against foreign source income.
- The amount of foreign tax that qualifies is not necessarily the amount of tax withheld by the foreign country. If you are entitled to a reduced rate of foreign tax based on an income tax treaty between the United States and a foreign country, only that reduced tax qualifies for the credit.
- If a foreign tax redetermination occurs, a redetermination of your US tax liability is required in most situations. You must file a Form 1040X or Form 1120X. Failure to notify the IRS of a foreign tax redetermination can result in a failure to notify penalty.
- A foreign tax credit may not be claimed for taxes on excluded income.
IRS Foreign Tax Credit Compliance Help
As you clearly can tell by the above list, the foreign tax credit compliance issues are as complex as advertised. Given such complexity, there is no reason for you to be financially hurt by inexperience. By obtaining the expert services of the international tax team at LSL CPAs, you can obtain the foreign tax credit you deserve without being overwhelmed by foreign tax credit compliance issues.
It is important to further note that this article presents only a partial view of the subject matter. It does not claim or attempt to be comprehensive or perfectly accurate. To learn more about how these IRS Foreign Tax Credit Compliance Issues, please call International Tax Consultant Yana Weaver at 714.569.1000.