IRS Exchange Rates for US Expats
U.S. expats face a number of challenges when trying to accurately file a U.S. income tax return with the IRS, some of which are due to the differences in economic realities in the United States and the local country of residence.
In this regard, we find that a number of clients tend to get bogged down with the issue of IRS exchange rates, the rules of which can seem confusing at first blush.
In this blog, we review what expats need to know about IRS exchange rates and how they should be used in the context of particular expat tax filings.
When do I need to convert foreign currency using an IRS exchange rate?
As a general rule, when reporting your income on a U.S. federal income tax return, you must convert any foreign currency you earn into the equivalent amount of U.S. dollars.
There are, however, certain forms that require the reporting of both foreign and U.S. currencies if the functional currency is foreign. A good example is the Form 5471, which asks for financial statement information of foreign companies in both the local functional currency and U.S. currency.
When converting to U.S. currency, is there an official IRS exchange rate that is used?
The IRS does not have its own official exchange rate. For regular periodic payments, such as employment income, the IRS website’s yearly average exchange rate is typically used.
For more singular or outstanding transactions, such as the sale of a business or a home, the IRS exchange rate for that day is more appropriate than the yearly average rate. Detailed historical exchange rate information is available on the Treasury Reporting Rates of Exchange page of the Treasury Department’s website. Other governmental sources include the Federal Reserve Bank and U.S. Department of Agriculture websites. The IRS also lists as acceptable the following third-party sites: Oanda.com, xe.com, and x-rates.com.
It should be noted that when it comes to a one-time income event, consideration should be given to the tax consequences associated with currency exchange differences if an item was bought or sold using non-US currency.
Which IRS exchange rate should I use to determine “maximum value” for purposes of the FBAR and FATCA forms?
In this regard, the IRS exchange rate is determined in the same manner for both forms. According to the instructions to both forms, you should use the currency exchange rate on the last day of the tax year to determine a maximum value amount. You should use this rate even if the asset or account reaches its maximum value in the middle of the year, and even if you have sold or otherwise disposed of the asset in the middle of the year.
For purposes of converting foreign currency, you should use the Treasury's Financial Management Service rate for the last day of the calendar year. If such rate is not available, you should use another verifiable exchange rate and provide the source of that rate.
How We Can Help
As a practical matter, to avoid any confusion or anxiety on the part of our clients, our online client questionnaire asks for financial information in local currency, leaving the burden on us to use the appropriate IRS exchange rate when relevant.
This is just one of the many ways our online service takes the hassle out of filing and ensure an accurate and timely filing of your tax return. Contact us for more information.