Publication 54
Tax Guide for U.S. Citizens and Resident Aliens Abroad

For use in preparing 2002 Returns

1. Filing Information

Topics

This chapter discusses:

• Whether you have to file a return,
• When to file your return and pay any tax due,
• How to treat foreign currency,
• Where to file your return,
• When you can treat your nonresident spouse as a resident,
• When you may have to make estimated tax payments, and
• Information returns and reports you may have to file.

Useful Items

You may want to see:

Publication

• 3   Armed Forces' Tax Guide
• 501   Exemptions, Standard Deduction, and Filing Information
• 505   Tax Withholding and Estimated Tax
• 519   U.S. Tax Guide for Aliens
• 520   Scholarships and Fellowships

Form (and Instructions)

• 1040-ES   Estimated Tax for Individuals
• 1040X   Amended U.S. Individual Income Tax Return
• 2350   Application for Extension of Time To File U.S. Income Tax Return
• 2555   Foreign Earned Income
• 2555-EZ   Foreign Earned Income Exclusion
• 2688   Application for Additional Extension of Time To File U.S. Individual Income Tax Return
• 3520   Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
• 4790   Report of International Transportation of Currency or Monetary Instruments
• 4868   Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
• 5471   Information Return of U.S. Persons With Respect To Certain Foreign Corporations
• 8822   Change of Address
• 8865   Return of U.S. Persons With Respect to Certain Foreign Partnerships
• SS-5   Application for a Social Security Card
• TD F 90-22.1   Report of Foreign Bank and Financial Accounts
• W-7   Application for IRS Individual Taxpayer Identification Number

See chapter 7 for information about getting these publications and forms.

Filing Requirements

If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and for paying estimated tax are generally the same whether you are in the United States or abroad.

Your income, filing status, and age generally determine whether you must file an income tax return. Generally, you must file a return for 2002 if your gross income from worldwide sources is at least the amount shown for your filing status in the following table:

Gross income.   This includes all income you receive in the form of money, goods, property, and services that is not exempt from tax.

For purposes of determining whether you must file a return, gross income includes any income that you can exclude as foreign earned income or as a foreign housing amount.

Self-employed individuals.   If you are self-employed, your gross income includes the amount on line 7 of Schedule C (Form 1040), Profit or Loss From Business, or line 1 of Schedule C-EZ (Form 1040), Net Profit From Business.

If your net self-employment income is $400 or more, you must file a return even if your gross income is below the amount listed for your filing status in the table shown earlier.

65 or older.   You are considered to be age 65 on the day before your 65th birthday. Therefore, you are 65 at the end of the year if your 65th birthday is on January 1 of the following year.

When To File and Pay

If you file on the calendar year basis, the due date for filing your return is April 15 of the following year. If you file on a fiscal year basis (a year ending on the last day of any month except December), the due date is 3 months and 15 days after the close of your fiscal year. In general, the tax shown on your return should be paid by the due date of the return, without regard to any extension of time for filing the return.

A tax return delivered by the U.S. mail or a designated delivery service that is postmarked or dated by the delivery service on or before the due date is considered to have been filed on or before that date.

You can use certain private delivery services designated by the IRS to meet the timely mailing as timely filing/paying rule for tax returns and payments. See your Form 1040 or Form 1040A instructions for a list of designated delivery services.

Extensions

You can get an extension of time to file your return. In some circumstances, you can also get an extension of time to file and pay any tax due.

However, if you pay the tax due after the regular due date, interest will be charged from the regular due date until the date the tax is paid.

Automatic 2-month extension.   You may be allowed an automatic 2-month extension to file your return and pay any federal income tax that is due. You will be allowed the extension if you are a U.S. citizen or resident and on the regular due date of your return:

1. You are living outside of the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico, or
2. You are in military or naval service on duty outside the United States and Puerto Rico.

If you use a calendar year, the regular due date of your return is April 15.

Service in a combat zone.   If you served in a combat zone or qualified hazardous duty area, see Extension of Deadline in Publication 3.

Married taxpayers.   If you file a joint return, either you or your spouse can qualify for the automatic extension. If you and your spouse file separate returns, this automatic extension applies only to the spouse who qualifies.

How to get the extension.   To use this automatic 2-month extension, you must attach a statement to your return explaining which of the two situations listed earlier qualified you for the extension.

4-month extension.   If you are not able to file your return by the due date, you generally can get an automatic 4-month extension of time to file. To get this automatic extension, you must file Form 4868. The form must show your properly estimated tax liability based on the information available to you.

Paperless filing.   You can file Form 4868 electronically (e-file) by telephone, using your personal computer, or through a tax professional. For more information about filing electronically, see the form instructions.

You may not be eligible. You cannot use the automatic 4-month extension of time to file if:

• You want the IRS to figure your tax, or
• You are under a court order to file by the regular due date.

When to file.   Generally, you must request the 4-month extension by the regular due date of your return.

Previous 2-month extension.   If you cannot file your return within the automatic 2-month extension period, you generally can get an additional 2-month extension of time to file your return, for a total of 4 months. The automatic 2-month extension and the 4-month extension start at the same time. You do not have to request the 4-month extension until the new due date allowed by the first extension, but the total combined extension will still only be 4 months from the regular due date.

Time to pay not extended.   A 4-month extension of time to file is not an extension of time to pay. You must make an accurate estimate of your tax based on the information available to you. If you find you cannot pay the full amount due with Form 4868, you can still get the extension. You will owe interest on the unpaid amount.

You also may be charged a penalty for paying the tax late unless you have reasonable cause for not paying your tax when due. Interest and penalties are assessed (charged) from the original due date of your return.

Extension beyond 4 months.   If you qualify for the 4-month extension and you later find that you cannot file within the 4-month extension period, you may be able to get 2 more months to file, for a total of 6 months.

You can apply for an extension beyond the 4-month extension either by sending a letter to the IRS or by filing Form 2688 . You should request the extension early so that, if refused, you still will be able to file on time. Except in cases of undue hardship, Form 2688 or a request by letter will not be accepted until you have first used the 4-month extension. Form 2688 or your letter will not be considered if you send it after the extended due date.

To get an extension beyond the automatic 4-month extension, you must give all the following information.

• Your reason for requesting the extension.
• The tax year to which the extension applies.
• The amount of additional time you need.
• Whether you have already requested another extension for time to file for this tax year.

You can sign the request for this extension, or it can be signed by your attorney, CPA, enrolled agent, or a person with a power of attorney. If you are unable to sign the request because of illness or for another good reason, a person in close personal or business relationship to you can sign the request.

Extension granted.   If IRS approves your application for this extension, you will be notified.

If an extension is granted and the IRS later determines that the statements made on your request for this extension are false or misleading and an extension would not have been granted based on the true facts, the extension is null and void. You may have to pay the failure-to-file penalty if you file after the regular due date.

Extension not granted.   If your application for this extension is not approved, you must file your return by the extended due date of the automatic extension. You may be allowed to file within 10 days of the date of the notice you get from the IRS if the end of the 10-day period is later than the due date. The notice will tell you if the 10-day grace period is granted.

Further extensions.   You generally cannot get an extension of more than 6 months. However, if you are outside the United States and meet certain tests, you may be able to get a longer extension.

You can get an extension of more than 6 months to file your tax return if you need the time to meet either the bona fide residence test or the physical presence test to qualify for either the foreign earned income exclusion or the foreign housing exclusion or deduction. The tests, the exclusions, and the deduction are explained in chapter 4.

You should request an extension if all three of the following apply.

1. You are a U.S. citizen or resident.
2. You expect to meet either the bona fide residence test or the physical presence test, but not until after your tax return is due.
3. Your tax home is in a foreign country (or countries) throughout your period of bona fide residence or physical presence, whichever applies.

Generally, if you are granted an extension, it will be to 30 days beyond the date on which you can reasonably expect to qualify under either the bona fide residence test or the physical presence test. However, if you have moving expenses that are for services performed in 2 years, you may be granted an extension to 90 days beyond the close of the year following the year of first arrival in the foreign country.

How to get an extension.   To obtain an extension, you should file Form 2350 with the Internal Revenue Service Center, Philadelphia, PA 19255-0002, the local IRS representative, or other IRS employee.

You must file Form 2350 by the due date for filing your return. Generally, if both your tax home and your abode are outside the United States and Puerto Rico on the regular due date of your return and you file on a calendar year basis, the due date for filing your return is June 15.

What if tests are not met.   If you obtain an extension and unforeseen events make it impossible for you to satisfy either the bona fide residence test or the physical presence test, you should file your income tax return as soon as possible because you must pay interest on any tax due after the regular due date of the return (even though an extension was granted).

You should make any request for an extension early, so that if it is denied you still can file your return on time. Otherwise, if you file late and additional tax is due, you may be subject to a penalty.

Return filed before test is met.   If you file a return before you meet the bona fide residence test or the physical presence test, you must include all income from both U.S. and foreign sources and pay the tax on that income. If you later qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction under the bona fide residence or physical presence rules, you can file a claim for refund of tax on Form 1040X. The refund will be the difference between the amount of tax already paid and the tax liability as figured after the exclusion or deduction.

Foreign Currency

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. How you do this depends on your functional currency. Your functional currency generally is the U.S. dollar unless you are required to use the currency of a foreign country.

You must make all federal income tax determinations in your functional currency. The U.S. dollar is the functional currency for all taxpayers except some qualified business units (QBUs). A QBU is a separate and clearly identified unit of a trade or business that maintains separate books and records. Unless you are self-employed, your functional currency is the U.S. dollar.

Even if you are self-employed and have a QBU, your functional currency is the dollar if any of the following apply.

• You conduct the business in dollars.
• The principal place of business is located in the United States.
• You choose to or are required to use the dollar as your functional currency.
• The business books and records are not kept in the currency of the economic environment in which a significant part of the business activities is conducted.

Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign currency and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income. You can generally get exchange rates from banks and U.S. Embassies.

If your functional currency is not the U.S. dollar, make all income tax determinations in your functional currency. At the end of the year, translate the results, such as income or loss, into U.S. dollars to report on your income tax return.

Blocked Income

You generally must report your foreign income in terms of U.S. dollars and, with one exception (see Fulbright grants, later), you must pay taxes due on it in U.S. dollars.

If, because of restrictions in a foreign country, your income is not readily convertible into U.S. dollars or into other money or property that is readily convertible into U.S. dollars, your income is blocked or deferrable income. You can report this income in one of two ways:

1. Report the income and pay your federal income tax with U.S. dollars that you have in the United States or in some other country, or
2. Postpone the reporting of the income until it becomes unblocked.

If you choose to postpone the reporting of the income, you must file an information return with your tax return. For this information return, you should use another Form 1040 labeled Report of Deferrable Foreign Income, pursuant to Rev. Rul. 74-351. You must declare on the information return that you will include the deferrable income in your taxable income for the year that it becomes unblocked. You also must state that you waive any right to claim that the deferrable income was includible in your income for any earlier year.

You must report your income on your information return using the foreign currency in which you received that income. If you have blocked income from more than one foreign country, include a separate information return for each country.

Income becomes unblocked and reportable for tax purposes when it becomes convertible, or when it is converted, into dollars or into other money or property that is convertible into U.S. currency. Also, if you use blocked income for your personal expenses or dispose of it by gift, bequest, or devise, you must treat it as unblocked and reportable.

If you have received blocked income on which you have not paid tax, you should check to see whether that income is still blocked. If it is not, you should take immediate steps to pay tax on it, file a declaration or amended declaration of estimated tax, and include the income on your tax return for the year in which the income became unblocked.

If you choose to postpone reporting blocked income and in a later tax year you wish to begin including it in gross income although it is still blocked, you must obtain the permission of the IRS to do so. To apply for permission, file Form 3115, Application for Change in Accounting Method. You also must request permission from the IRS on Form 3115 if you have not chosen to defer the reporting of blocked income in the past, but now wish to begin reporting blocked income under the deferred method. See the instructions for Form 3115 for information.

Fulbright grants.   All income must be reported in U.S. dollars. In most cases, the tax must also be paid in U.S. dollars. If, however, at least 70% of your Fulbright grant has been paid in nonconvertible foreign currency (blocked income), you can use the currency of the host country to pay the part of the U.S. tax that is based on the blocked income. To determine the amount of the tax that you can pay in foreign currency, get Publication 520. You may also be able to get details of these arrangements from the U.S. Educational Foundations or Commissions in foreign countries.

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