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Who's Responsible For Tax?
This question seems simple but is important. After all, if you’re a U.S. citizen or permanent resident, you must report your worldwide income to the IRS even if you’re paying tax on it somewhere else. See Expats Lobby For Tax on Residence, Not Worldwide Income. Moreover, you must file an FBAR every year disclosing your bank accounts if their aggregate value exceeds $10,000 at any time during the year…The penalties for either failure are big, potentially even criminal. See Can Foreign Account Nondisclosure Be A Conspiracy?
Paying taxes is required for both citizens and non-citizens.
For all of those reasons, it’s important to know if you are a mere signatory on an account without a beneficial interest in it. That could mean you have FBAR filing obligations but that you don’t have income when the account earns interest. That could mean, for example, that you might need to file some back FBARs and disclose the account to the IRS, but might not need to go into the IRS voluntary disclosure program (since you don’t owe any tax)…
How do you know if you meet this fact pattern or how these accounts are evaluated? If A and B have a joint interest-earning bank account producing $100 of income, who pays tax on it? Perhaps it only seems fair for each person to have $50 of income, but it is often not that simple.
If A’s Social Security number is linked to the account, won’t A receive a Form 1099-INT from the bank for all the interest? If so, A may feel forced to pay all the tax. Yet some taxpayers finesse the situation by reflecting the Form 1099 on their return but showing a deduction for the interest paid to their co-account holder.
With foreign accounts the stakes are particularly high. With a foreign bank, there will be no IRS Form 1099 to alert the holders about the income and its reporting. Moreover, nettlesome questions about FBARs and tax return reporting are likely to arise. If you are a signatory, you should file an FBAR.
But do you also have income from the account that must be reported to the IRS? You may have a formal or informal power of attorney or other signature authority without beneficial ownership. With informal family dealings, each person may not be certain what he has.
Often, who owns the account under prevailing local law should control. But the IRS and the courts will generally evaluate the facts and the conduct of the parties and look for beneficial ownership. That means the local law owner may be different from the beneficial owner.
