Reporting foreign income(dividends from mutual funds and bank interest) as regular US interest?

The EA that you spoke to is correct.

Unless you are a shareholder in a PFIC, forget Form 8621. A Passive Foreign Investment Company is a foreign company that either derives 75% or more of its income from passive activities or 50% or more of its assets are held for the production of passive income. Mutual fund dividends and bank interest are not passive income under the US Tax Code. You can't "choose" to treat it as such.

The bank interest is ordinary income and is reported on Form 1040, line 8a. Attach Schedule B if necessary.

Unless the dividends are classified as qualified dividends under the IRC (which probalby is not the case with foreign dividends) they are ordinary dividends and are reported on Form 1040, line 9a. Again, attach Schedule B if necessary.

If you paid any foreign taxes on the dividends or interest you can take a credit for those on Form 1116. The credit is the lesser of the foreign tax paid or the tax that the IRS would have assessed on the income.

Forget Form 2555 as alluded to by one response. That applies only to foreign earned income if you reside outside of the US. Dividends and interest are not earned income regardless of where you reside.

As far as any audit is concerned, what do you care? If you have proof of the income an audit is nothing to be concerned about. With only $1,000 involved you won't be raising any flags at the IRS anyway. Since it's less than $1,000, Schedule B isn't even needed.

One thing to watch out for is the FBAR reporting requirements. If you have ownership or signatory control over foreign bank, investment, or financial accounts with an aggregate value in excess of $10k at any time during the year you must file a TD F 90-22.1 http://irs.gov/pub/irs-pdf/f90221.pd... report. You may also be required to file a Form 8938 in addition to the TD F 90-22.1. Here's a link to the instructions for Form 8938 to determine if that needs to be filed: http://irs.gov/pub/irs-pdf/i8938.pdf .

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reporting foreign income(dividends from mutual funds and bank interest) as regular US interest?
Computing taxes on the foreign income(dividends from mutual funds and bank interest) is confounding to me.

An Enrolled Agent told me to report them as regular US interest, pay the tax on it. He told me that the dividends may not qualify for the special dividend rate but considering the total...

You report it just the same as you would US dividends and interest.

You will not be an audit candidate because IRS wasn't notified that you received income.

If there was any foreign tax withheld, you can claim a credit against your US tax.

Owning shares in a foreign mutual fund is owning a PFIC, and Form 8621 does apply.

looking at the 8621 it is 'passive' income and interest is not passive nor is dividends
have you looked at forms 1116 and 2555 reporting foreign income?
interest and dividends are not cap gains which would be the rates you are referring
frankly 'everyone' is subject to audit, you don't stand out any louder than the next guy

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