1. I earned interest on a foreign account this year. Do I need to report the interest earned on my tax return? If so, how do I do so?

The short answer is: it depends. If you are a U.S. citizen or legal permanent resident (aka “resident alien”), you are required to report any interest earned on foreign bank accounts as part of your worldwide income.

tax questions

You will need to report the interest earned on your foreign bank account, along with any interest earned from domestic accounts, on Form 1040. In addition, you’ll need to file Schedule B if you had an interest in or signature authority over a financial account in a foreign country, regardless of whether you earned more than $1,500 in total interest and/or dividends this year. When converting the foreign currency into U.S. dollars, you will need to use the exchange rate applicable at the time the interest/income was earned. Finally, if the interest earned is taxable in the foreign country too (which is quite often the case), you may claim a foreign tax credit on any taxes paid to the other country.

If you are not a U.S. citizen or legal permanent resident, you are not required to include the interest earned on your taxes. That is not to say, however, that you have no reporting obligations. On the contrary, if you’re identified as a “U.S. person” (i.e., a person doing business in the U.S. on a regular and ongoing basis, a domestic corporation, etc.) and you have a financial interest in or signature authority over a foreign account(s) that is valued at more than $10,000 at any time in the year, you will need to report any/all foreign bank accounts to the IRS. Our recommendation for anyone who has questions about their offshore bank accounts is to consult with a FBAR tax lawyer who has extensive experience in knowing all the rules and forms needed to work with the IRS and mitigate any preliminary penalties.

2. The IRS e-mailed me and directed me to a website where I can go to file my tax return. Does the IRS communicate with taxpayers via e-mail now?

No. If you receive an e-mail claiming to be from the IRS, do not open any attachments or click on any links — they might contain viruses. All such e-mails should be forwarded to the IRS at phishing@irs.gov. To be safe, delete the original message after you’ve forwarded it to the IRS.

3. I owe back taxes to the IRS. Does this mean that the IRS will garnish my state refund?

It depends. The IRS only has the authority to garnish your state refund if both of the following requirements are met:

(1) You neglected to pay the tax after the IRS assessed the tax and sent you a Notice and Demand for Payment.
(2) You received a Final Notice of Intent to Levy and Notice of Your Right to a Hearing at least 30 days before the levy.

Note that if the IRS does decide to garnish your state refund, you may receive a Notice of Levy on your State Tax Refund or a Notice of Your Right to Hearing afterwards.

4. Is there a limit on the number of years I can claim a loss in an Internet-based business?

No, the IRS does not set a limit on the number of years one can claim a loss in an Internet-based business. It is possible, however, that the IRS may determine that you’re no longer engaging in business for a profit (the presumption is that you’re running a for-profit business if it is profitable for 3 of 5 consecutive years), in which case you would have to claim the business as a hobby. Claiming the business as a hobby means you’re subject to hobby-loss rules. In other words, you can only deduct your hobby expenses to the extent that income was earned on those expenses.

About the Author: tax attorney Los Angeles, Vic Abajian was a Senior Trial Attorney with the IRS Office of Chief Counsel where he was recognized by the Department of Treasury for his exemplary service. As a team of Senior IRS Tax Lawyers, Abajian Law has successfully represented clients on all types of tax issues.