International Tax Guide

If you work abroad for part of the year, or earn income from investments overseas, the Internal Revenue Service expects to see that income on your tax return. Typically, there are four sources of income the IRS is interested in: salary and bonuses, interest-bearing bank accounts, investment portfolios and real estate.

The bad news is that you're most likely going to be subject to taxes both from the country you're living in and the U.S. The good news is that rather than getting double-taxed, the IRS offers some relief including credits and exclusions. If you have assets abroad or spent time working overseas last year, here's what you'll need to do this tax season.

Those who decide to pass on declaring their foreign assets may be in for an unpleasant surprise. While the IRS doesn't have a formal system to track the income received abroad, it may question income that's being moved around from one account or investment to another. The ramifications can be financially devastating. For example, if the IRS finds out that you transferred money from a foreign-based bank account into a U.S.-based account without filing the proper tax forms, they could potentially fine you anywhere from $10,000 to $100,000 or up to 50% of your balance, says Brittney Saks, a partner in the Private Company Services Group of PricewaterhouseCoopers.

To avoid any snafus with the IRS, here's how you should report your income if you own any of the following overseas assets.

Unlike banks in the U.S., foreign banks don't send 1099 forms reporting the amount of interest an account holder's account gained in the past year. Instead, you'll need to reconstruct that interest on your own. One quick way is to add up all of the interest that accumulated on your monthly statements for 2007 and to include that income on your return, says Saks. Just don't forget to convert everything to U.S. dollars.

In order to avoid being taxed twice, you may claim a foreign tax credit. How it works is that the IRS will calculate the tax on your foreign-sourced income. If the foreign tax rate is higher than the U.S. rate, there will be no U.S. tax on the foreign income. If the foreign tax rate is lower than the U.S. rate, the IRS will tax you on the difference between the two rates. To claim this credit, complete Form 1116 and attach it to your U.S. tax return.