International Tax Law – Tax Compliance for Expats in Korea

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For many Americans, moving abroad is an exciting opportunity to travel the world and live life to the fullest. Whether your motivation is to find your Zen in southeast Asia or take your career to the next level, it’s easier than ever to pack up and relocate to a foreign country— as long as you stay compliant with your U.S. expat taxes.

Expats are drawn to Korea because of the country’s advanced and modern development. South Korea prides itself as among the world’s leading producers of electronic products. It is a place that incorporates both tradition and modernity in its culture; expats find its cities dazzling with colossal towers alongside temples and historic buildings, which have now become UNESCO world heritage sites.

Generally, U.S. citizens residing in Korea have four main duties when they hold a reportable interest in a Korean financial account:

(1) report all income generated by the account on their federal income tax return (i.e., Form 1040, U.S. Individual Income Tax Return);

(2) check the ‘yes‘ box in Part III, Foreign Accounts and Trusts, of Schedule B, Interest and Ordinary Dividends, to Form 1040 to disclose the existence and location of the foreign account;

(3) electronically file an FBAR (Report of Foreign Bank and Financial Accounts); and

(4) report the foreign account on a Form 8938, Statement of Specified Foreign Financial Assets, depending on the facts.

We shall discuss these duties in detail below.

The experienced dual licensed International Tax Attorneys and CPAs of The Tax Law Offices of David W. Klasing can provide trusted guidance for an array of taxes for expats in Korea and related offshore account disclosure issues. To schedule a confidential consultation over the phone, online, or to meet with us at our Los Angeles or Irvine tax law offices, click here or call 800-681-1295.

The Economy of South Korea

South Korea outdid itself by significantly reducing poverty with massive economic growth. The government’s policies brought about real gross domestic product (GDP) growth averaging 5.45% annually between 1988 and 2019. This rapid success was also supplemented by annual export growth averaging 9.27% during the same time. South Korea is a member of the OECD and currently has the 10^th largest economy in the world, based on GDP.

Such phenomenal economic success led to Korea becoming an inspiration for many developing countries when it comes to improving the living standards of their inhabitants, sustainable development, and improving the infrastructure of their countries while also maintaining exponential economic growth. The government has also persistently offered official development assistance (ODA) budget and provided US$ 2.2 billion, representing 0.14% of gross national income (GNI) in 2020.

South Korea’s Appeal to American Expats

With an estimated 120,000 to 158,0000 Americans, South Korea has become a popular destination for American expats. South Korea has seen exponential economic growth in recent years, primarily through industrial exports such as car manufacture, electronics, and telecommunication. This is also accompanied by a high demand for native English speakers in South Korea, and many American expats choose jobs as English language teachers.

U.S. Expatriates Living Abroad Must Make FBAR Disclosures

Under the Bank Secrecy Act, an FBAR (Report of Foreign Bank and Financial Accounts) filing obligation exists for all U.S. taxpayers with foreign accounts with balances exceeding $10,000. Hence, you are required to file an FBAR if you are a U.S. person with signature authority over, or financial interest in, a South Korean bank account(s), the aggregate value of which surpassed $10,000 at any point in time, no matter how briefly, during the relevant reporting year.

FBAR must be filed online using FinCEN Report 114, available exclusively through the BSA E-Filing System, which replaces Form T.D. F 90-22.1 used in previous years. The next deadline for FBAR is April 15 of the following year, extended to October 15, if necessary. Recent amendments to the law not only created a penalty for even inadvertent FBAR compliance errors but also strengthened the penalties that can be imposed for willful FBAR violations. Even an FBAR compliance failure that is the product of a mistake or oversight can be punished with a fine of up to $10,000 for each year where the account was in a non-compliant state.

While the penalties for an accidental non-compliance are harsh, the penalties for a willful failure to make an accurate and complete FBAR disclosure are even harsher. Failure to file an FBAR can have severe financial consequences – even in cases where the taxpayer’s misconduct was purely accidental. Negligent failure to file may be penalized with a fine of up to $10,000 per violation, while deliberate or “willful” failure to file an FBAR is a federal felony subject to the following penalties:

• A civil penalty of up to $100,000 per violation or 50% of the balance in the problematic account, whichever amount is more significant.
• A criminal fine of up to $250,000.
• A prison sentence of up to five years.

Moreover, a criminal conviction will create a felony record, which can be highly burdensome concerning employment, lending, housing, professional certification and licensing, and many other parts of daily life.

FBAR Reporting Rules

A “foreign financial account” is a financial account located outside the U.S. The U.S. includes the states, the District of Columbia, territories, and possessions of the U.S., and certain Indian lands. An account maintained with a branch of a U.S. bank that is physically located outside of the U.S. is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the U.S. is not a foreign financial account. Thus, an account in a foreign branch of a U.S. bank is subject to the FBAR reporting rules.

Filers need to reasonably figure and report the greatest value of currency or non-monetary assets in their accounts during the calendar year. Taxpayers may rely on their periodic account statements if the statements fairly show the greatest account value during the year. If not already in U.S. dollars, that value is converted into U.S. dollars using the Treasury Bureau of the Fiscal Service exchange rate on the last day of the calendar year.

Filers who electronically submit FBARs jointly with spouses, or wish to submit them through third-party preparers, should complete FinCEN Form 114a “Record of Authorization to Electronically File FBARs.” FinCEN Form 114a authorizes a preparer to submit the FBAR electronically and to communicate with FinCEN on behalf of the filers. FinCEN Form 114a must be maintained by the filer and account owner and made available to FinCEN or IRS upon request.

U.S. Expatriates Living Abroad Must Make FATCA Disclosures

The Treasury Department’s FBAR requirements, which are imposed under the Bank Secrecy Act, should not be confused with FATCA (Foreign Account Tax Compliance Act) reporting requirements, which are imposed under the Internal Revenue Code. The two reporting regimes are separate, and there are many differences between them, but they do overlap, and some taxpayers must report under both regimes. The FATCA requirements cover a broader class of foreign assets than the accounts covered by the FBAR requirements. For example, foreign hedge funds are covered by the FATCA but not the FBAR requirements.

Virtual Currency/Cryptocurrency

Currently, the FBAR regulations do not define a foreign account holding virtual currency/cryptocurrency as a type of reportable account. For that reason, under current rules, a foreign account holding virtual currency/cryptocurrency is not reportable on the FBAR (unless it is a reportable account otherwise, because it holds reportable assets besides virtual currency/cryptocurrency). However, FinCEN intends to propose to amend the FBAR regulations to include virtual currency/cryptocurrency as a type of reportable account.

IRS has not officially taken a position on whether a virtual currency account, such as Bitcoin, over $10,000 is subject to FBAR reporting. But, as discussed directly above, FinCEN intends to change the FBAR regulations to make foreign accounts holding virtual currency/cryptocurrency reportable. As a protective measure, taxpayers might want to file FBARs for exchange accounts where they have a combination of cash and virtual currency/cryptocurrency), and the cash exceeds the $10,000 threshold.

Reporting Requirements

Taxes for expats include other reporting requirements than just telling the IRS about your salary. If you have foreign financial assets and investments, you may have additional forms and filing requirements.

Filing taxes as a U.S. expat isn’t easy — many tax forms seem identical and knowing which is which can cause you a headache. For example, take your FBAR (FinCEN 114) and your FATCA Form 8938 — you may have to fill out one, none, or both. A significant difference between the two is that the FATCA Form 8938 gets sent to the IRS, and your FBAR gets sent to FinCEN, the U.S. Treasury Department’s Financial Crimes and Enforcement Network.

These are the most commonly used forms when filing U.S. taxes for expats.

1. Form 1040 – The form every American files during tax season to report income to the IRS.
2. FBAR (FinCEN Form 114) – Your Foreign Bank Account Report, used to report any assets in foreign financial institutions to the Financial Crimes Enforcement Network of the U.S. Treasury.
3. Foreign Earned Income Exclusion Form 2555 – One of two methods for U.S. expats to avoid double-taxing income earned abroad.
4. Foreign Tax Credit Form 1116 – One of two methods for U.S. expats to avoid being double-taxed on income earned abroad.
5. FATCA Form 8938 – How you report assets in foreign financial institutions to the IRS.
6. Form 5471 – Informational return for U.S. citizens who are also shareholders, officers, or directors of a foreign corporation.
7. Form 8621 – Informational return for U.S. citizens who are also shareholders of a passive foreign investment company.
8. Form 3520 – Informational return expats use to report certain transactions with foreign trusts, ownership of foreign trusts, or if you receive certain large gifts from certain foreign persons

Tax Laws

The U.S. and Korea drew up a Totalization Agreement in 2011, allowing expats who work in Korea to be covered under either U.S. Social Security or the Korean national pension system. Expats pay 4.5% into the national pension by choice. Furthermore, there is a mandatory .55% tax for employment insurance and a surcharge that ranges from .75% to 22.65% for Industrial Accident Insurance.

If one is a U.S. citizen or resident, they will still be required to file U.S. taxes each year. If a person has assets in foreign bank accounts, they are likely to be required to report those as well.

Failure to File Taxes

When are taxes due for expats living abroad? What happens if you’ve never filed? Understanding your expat tax deadlines and the associated penalties of non-compliance will be vital in avoiding fines, fees, and nasty surprises from the IRS.

If you are not compliant with your U.S. expat taxes, you can lose your passport. You can also face fines and penalties ranging from a couple of thousand dollars to jail time for serious tax evaders. The best way to avoid tax penalties is to make sure to engage professionals who have expertise in the area. The experienced dual licenses International Tax Attorneys and CPAs of The Tax Law Offices of David W. Klasing can provide you with a full range of services to cater to your every need.

It’s common for Americans living and working overseas to overlook their tax obligations—many don’t even know they have to file U.S. taxes. If you’re a U.S. citizen abroad who has never filed a tax return, you’re in luck — the IRS understands it’s a confusing topic and generally shows lenience with genuine mistakes. You can get caught up on multiple years of U.S. expat taxes with the Streamlined Filing Compliance Procedures which will eliminate criminal exposure and avoid most of the penalties involved.

Streamlined Filing Compliance Procedures (SFCP)

The streamlined filing compliance procedures (“streamlined procedures”) are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide taxpayers in such situations with:

• a streamlined procedure for filing amended or delinquent returns, and
• terms for resolving their tax and penalty procedure for filing amended or delinquent returns, and
• terms for resolving their tax and penalty obligations.

Eligibility for Streamlined Disclosure:

• 1. The program is available to individuals and to individual estates.
• 2. There is no tax eligibility threshold.
• 3. Taxpayers must certify that their failure to report all income, pay all taxes, and submit all information returns (including FBARs, formerly TDF 90-22.1) was non-willful.
• 4. The program is not available to taxpayers who submit OVDP voluntary disclosure letters after July 1, 2014, or those who have already received a closing letter under OVDP / VDP.
• 5. A taxpayer eligible for treatment under the streamlined procedures who submits, or has submitted, a voluntary disclosure letter under the OVDP, VDP (or any successor offshore voluntary disclosure program) prior to July 1, 2014, but who does not yet have a fully executed OVDP closing agreement, may request treatment under the applicable penalty terms available under the streamlined procedures. A taxpayer seeking such treatment does not need to opt out of OVDP but will be required to certify, in accordance with the IRS instructions, that the failure to report all income, pay all tax, and submit all required information returns, including FBARS, was due to non-willful conduct. As part of the OVDP process, the IRS will consider this request in light of all the facts and circumstances of the taxpayer’s case and will determine whether or not to incorporate the streamlined penalty terms in the OVDP closing agreement.

Treatment Under SFCP:

• 1. Eligible taxpayers must pay all taxes due and file amended returns.
• 2. No tax penalties will be imposed.
• 3. There is no closing agreement.
• 4. Returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U.S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources. Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct and who therefore seek assurances that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating in the Offshore Voluntary Disclosure Program (OVDP) and should consult with their professional tax or legal advisors.
• 6. After a taxpayer has completed the streamlined filing compliance procedures, he or she will be expected to comply with U.S. law for all future years and file according to regular filing procedures.

At the Tax Law Office of David W. Klasing, we are California Tax Attorneys & CPAs with a long record of successfully representing American expats in civil and criminal (Eggshell) audits, Appeals & Litigation before the IRS and California taxing authorities. Equipped with over 30 years of business bookkeeping and accounting experience, including more than two decades of public accounting auditing experience, our Dual Licensed California Tax Lawyers & CPAs can protect and advise you for whatever issue may arise regarding your case.

The IRS has long proven itself extremely capable of investigating both civil tax fraud and criminal tax fraud in relation to taxation issues relating to expatriates. The investigation of tax fraud is one of the most important phases in the administration and enforcement of tax laws. Considering that over the years, numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts, or nominee entities, the taxing authorities have significantly increased their enforcement activities.

Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements between the U.S. and partner jurisdictions, automatic third-party account reporting has grown consistently. The IRS continues to receive more information regarding potential non-compliance by U.S. persons because of the Department of Justice’s Swiss Bank Program. This information makes it less likely that offshore financial accounts will go unnoticed by the IRS.

With the Offshore Voluntary Disclosure Program coming to a close on Sept. 28, the IRS reminded taxpayers there is a limited amount of time to take advantage of this option. Potential civil penalties increase substantially if U.S. taxpayers associated with participating banks wait to resolve their tax obligations.

We advise you to seek legal guidance from a dually California licensed Tax Attorney and CPA immediately if you have any concerns regarding your international tax and information reporting obligations. You should be aware an audit could lead to an unexpected tax assessment, costly accumulated interest, and substantial civil penalties. If your case is not handled properly, there is always the possibility that your case will be referred by the civil examiner to the IRS’s criminal investigation division (CID).

Furthermore, our Korean Tax Attorney, Mr. Rap Choi, can speak fluent Korean and help you get the best assistance possible. Dr. Unghwan “Rap” Choi, Ph. D., Esq., is an experienced international tax attorney with over 30 years of experience of assisting both corporations and high-net-worth individuals in the U.S., Korea, and other nations in a number of critical tax issues, including cross-border tax planning and compliance (including Transfer Pricing), tax appeals and mutual agreement procedures, Advance Pricing Agreements, BEPS compliance and BEPS documentation, international estate and gift tax issues, mergers and acquisitions (M&A) advising, and valuation of companies and intangibles. Dr. Choi worked as a senior partner in the largest law firm in Korea and as head of international tax for a Big 4 firm in Korea, so he brings years of experience dealing with the Korean government, including the Korean tax authorities, on various Korean tax issues for expats and foreign invested companies in Korea.

How Can We Help You?

If you’re considering moving to or from South Korea, you should consult with an experienced dual licensed International Tax Attorney & CPA before you depart. Expatriates and U.S. citizens abroad are subject to some of the world’s most complex tax liabilities and reporting requirements. Even innocent mistakes can have lasting financial and legal ramifications for non-compliant taxpayers. If you have concerns about past tax filings and need further consultation on taxes for expats in South Korea or have experienced a failure to disclose certain offshore accounts, the time to take action is now. The Tax Law Offices of David W. Klasing can advocate and negotiate with the IRS on your behalf. To schedule a reduced-rate tax consultation, call us at 800- 681-1295 or schedule online here.

Here is a link to our YouTube channel: click here!

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