When a foreign country places restrictions on its currency, making it difficult or impossible to readily convert into U.S. dollars, the income that has been locked up in the foreign currency is referred to as “blocked income.” To report this blocked income, you either include it in your gross income and pay tax on it in the year it was earned or file an information return reporting the income but deferring the tax due.
If you choose to file an information return and defer the tax due, specific procedures must be followed as outline in IRS Publication 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad. In order to include reported blocked income (which is still blocked at the time of filing) from a prior year in your gross income for the current year, you must file Form 3115 Application for Change in Accounting Method. Additionally, if you have included blocked income in your gross income in a prior year and now wish to begin using the deferred method, you must request permission from the IRS by filing Form 3115. One original Form 3115 must be timely filed with your federal income tax return (including extensions) for the year of the change. A copy of Form 3115 must also be filed to the address specified in the instructions no earlier than the first day of the year of change and no later than the date the original is filed with the federal income tax return for the year of change. The original Form 3115 filed with your federal income tax return does not need to be signed, however, the copy of Form 3115 being submitted separately must be signed. It is important to keep track of the filing deadlines and timely file Form 3115.
If you fail to timely file Form 3115, you may submit a private letter ruling request to request an extension of time to file “in unusual and compelling circumstances.” See § 6.03(4)(b) of Rev. Proc. 2015-13 and Treas. Reg. § 301.9100-3.