# Foreign earned income, FBAR, etc



## Yossarian1 (Mar 9, 2015)

Hello Everyone,
I am looking for some advise, because I get contradictory info from CPAs, consultants, etc. I see some of you are quite experts on these matters.

Background
I am an italian engineer, I work most of the year (let's say 11 month) in the US branch of an italian company. I have a non-resident visa E1.
My contract is with the italian company, which pays me directly (in euro).
I have been living in US for 9 years.


Issue #1: foreign earned income exclusion
Because I meet the substantial presence test, I am a US resident alien for tax purposes. My CPA has always pushed me to declare the worldwide income, but then we subtract a part of it based on my presence it Italy. So, if I stay (and work) there for 1 month, we claim 1/12 of the total salary as "foreign earned income exclusion".

It's easy to demonstrate that my Tax home is Italy (I pay taxes also there, the contract is with the italian company)
It's easy to demonstrate that my "abode" (family, intention to return) is there.
However, another CPA is arguing that I cannot claim it because the only people who can do it are those who meet the "bona fide resident test" on the same year for which you are paying the taxes. 
Who is right?

Issue #2: FBAR
I learned about FBAR requirements recently. My CPA never mentioned that to me... I have no intention to enter in a OVDI program (I don't have millions of untaxed money in some Cayman Island account, it's just the savings of life in a bank in my home country), so the questions are:

- outside the OVDI and the streamlined program, for what I understand I see 2 options: (a) quite disclosure, and (b) "almost quiet disclosure", where the taxpayer include a letter where he explains why he is submitting late FBARs. Do you advise to include this letter?
- can anyone give me (it's ok in a private message) a contact for a honest tax attorney or CPA expert on these matters that can evaluate my case in details? (when I say "honest" I mean someone who will not push to opt for the most time consuming option just to raise its bill)

thanks!
Yossarian


----------



## Bevdeforges (Nov 16, 2007)

Issue #1: In order to take the FEIE you must qualify under either the physical presence test or the bona fide resident test. Both of those tests require that you spend a full year (12 consecutive months for the physical presence, one calendar year for the bona fide resident) outside the US. You have no reason to exclude 1/12 of your salary under the FEIE - particularly if you meet the substantial presence test making you a US resident for tax purposes.

If you've been doing this for the past 9 years with no comment from the IRS, I'm really surprised. But perhaps the amounts involved aren't enough for the IRS to bother with (if it's only one month a year of salary). Also, you might actually do better to just take the Foreign Tax Credit if you're paying full income taxes anyhow in Italy.

Issue #2: According to the rules, you are supposed to file FBARs if you are a "US person" and have at least $10,000 in foreign (i.e. non-US) accounts. As long as you have been filing your US tax returns, there's no real "risk" to filing the FBARs - it's only a reporting filing. There is no tax attached to the filing. As far as back filing goes, that's more or less up to you. With the various FATCA provisions kicking in this year, it's probably most important that you start filing your FBARs. Backfiling normally is for 6 prior years, but would depend on your status during those past 6 years.

There isn't one "correct" answer here. You need to decide which option you want to take. (And if the IRS is letting you get away with taking the FEIE for one month's worth of salary, maybe the simplest solution is to just keep doing what you're doing.)
Cheers,
Bev


----------



## BBCWatcher (Dec 28, 2012)

What are you doing for social insurance? Are you paying into the U.S. system or the Italian system?


----------



## ForeignBody (Oct 20, 2011)

The FBAR website has one of the choices for filing late as "Did not know that I had to file". If that is true for you then use it.


----------



## Yossarian1 (Mar 9, 2015)

Hello, 
thanks for the answers.
A few replies:
*@ Bevdeforges*
Issue#1: I understand. What about the "dual status aliens"? (see w w.irs.gov/Individuals/International-Taxpayers/Taxation-of-Dual-Status-Aliens)
_You are a dual status alien when you have been both a U.S. resident alien and a nonresident alien in the same tax year. In determining your U.S. income tax liability for a dual-status tax year, different rules apply for the part of the year you are a resident of the United States and the part of the year you are a nonresident._
For the tax credit, I already take a tax credit in Italy, even if I take it in US, the next year I would have to give it back because of the "foreign tax redermination"
Issue #2
Considering that I am not a US citizen, and that my bank in Italy considers me an italian resident, my name would probably never end up in a "HSBC like list", but I still want to put things straight, without exaggerating...
There is one thing I don't understand in the late FBAR filing: I see the option of the "did not know.." but other websites suggested to include a letter to explain the "reasonable cause". Any differences in the chances of getting an audit?

*@bbc watcher* I pay the social security in Italy, in US I don't even have a W2, because I am under contract with the Italian company


----------



## Bevdeforges (Nov 16, 2007)

You want to take a good look at IRS publication 519 Publication 519 (2014), U.S. Tax Guide for Aliens chapter 6 on Dual Status aliens. I'm not sure if you can maintain the dual status status for multiple years, though.

On issue #2 - At this point, the FBARs don't actually lead to getting audited. That may change as this FATCA thing gets ramped up, but the FBARs really are nothing but a listing of your accounts, with a "high balance" figure. To be honest, they have no way of validating the precise number you give them as (if I understand correctly) the foreign banks are going to be reporting only year end balances, and even then, I suspect, in foreign currency. Chances are, they won't question any balance you give them unless there is a major discrepancy between what you report as a "high balance" and the converted year end balance.

The option of selecting "I didn't know" really is the best option. Last time I checked, they only wanted a letter if none of the options you can choose among are applicable.
Cheers,
Bev


----------



## BBCWatcher (Dec 28, 2012)

Check the U.S.-Italy social security treaty to see if you (and your employer) should switch over to the U.S. system. I think you were supposed to do that after 5 years in the circumstances, but better late than never.

I mention that because the U.S. system is a better deal for you, most probably -- at least if you can stay in the U.S. system for a couple years or more.


----------

