Question 7

Tax Fraud – Frequently Asked Questions (page 7)

Does it matter whether the client’s business was incorporated in the United States if his clients were abroad and services he performed were abroad?

American citizens are taxed on their world-wide income, on anything earned anywhere (see § 61(a) of Internal Revenue Code, defining “gross income”). Thus, if a client earned money abroad, \through business conducted there with local clients, he would still be responsible for reporting the income and paying tax if the business in which he earned income is incorporated in the United States. Moreover, if the client maintained a United States residence for the entire time he conducted his business, then that only supports the premise that he breached his duty to disclose and to pay income tax.

Despite the fact that it may be demonstrated that the majority of the business conducted took place abroad, notwithstanding that some consultations occurred while the client was within the United States, the client is still subject to taxation and as such, is required to pay taxes at the time of receipt of income. Clearly, not at the time of receipt, per se, but in his income tax return for the taxable year in which the income was received.  (In nearly all cases, an individual’s taxable year is the calendar year.)

The client is obligated to report income in his return for the year of receipt and pay the tax due thereon on the due date of the return (April 15).  Though one can get an extension to Oct. 15 to file a return, payment is due on April 15 and interest and late payment penalties will be incurred from April 15 if the tax due is not then paid.  There is also an addition to the tax (effectively, though not in name, a penalty) for failing to pay sufficient estimated tax in advance.