Australia Account & Asset U.S. Tax Filing Case Study Examples

Australia Foreign Account and Asset Case Study Examples

Australia Foreign Account and Asset Case Study Examples

U.S. Person foreign account holders across the globe are required to report their foreign accounts, assets, and investments each year to the IRS and FinCEN on various international information reporting forms. Some of the more common foreign IRS tax forms that taxpayers have to file are the FBAR (FinCEN Form 114), Form 8938 (FATCA), and Form 8621 (PFIC). Depending on the number of assets the taxpayer has and whether these assets generate income can impact the complexity of the filing and which forms need to be reported each year. Golding & Golding represents clients in over 85 countries. Below, please find some of the more common examples of foreign account reporting for taxpayers with accounts in Australia.

First, the FBAR/Foreign Account Basics

Not all taxpayers are required to file every foreign tax form each year. Rather, it depends on the category of asset and the value of the accounts owned by the account holder. In some years, the taxpayer may be required to file multiple forms to report their various assets, including reporting the same asset on different forms. Conversely, in other years, the taxpayer may not meet the threshold requirements for reporting or may meet the threshold filing requirements for some forms but not for others. Noting that the filing due dates for the different forms will vary, for example, while the FBAR is on an automatic extension, other forms require the taxpayer to file either a Form 4868 (or equivalent extension procedure) or Form 7004.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only, and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice. 

Australian Superannuation Only

• • • Frank relocated to the United States a few years ago on an E-3 visa. In preparation for his relocation to the United States, Frank closed all his foreign accounts — but he still has a substantial Australian superannuation at UniSuper. Even though Frank does not have any foreign bank accounts or investment accounts, since he has an Australian superannuation valued at over $2M, he is still required to report this asset for U.S. tax purposes.

Superannuation and Bank Accounts

• • • Fran is a lawful permanent resident who lives in the United States and still has various assets and accounts in Australia, which are primarily superannuation and bank accounts. Fran filed the Form 8938 and FBAR to report her bank accounts, but misunderstood that superannuation was required to be reported as well. Fran should submit to one of the offshore amnesty programs to try to minimize or avoid penalties.

Superannuation and Low Dollar Bank Accounts

• • • Felix is a U.S. citizen who previously lived and worked in Australia. He has a sizeable superannuation account and two small dollar bank accounts. Since the bank accounts are below $10,000 and he was unaware that a pension was reportable for U.S. tax purposes, Felix did not file any international information reporting forms. Felix should submit to one of the offshore amnesty programs to try to minimize or avoid penalties.

SMSF (Primarily Employee Contributions)

• • • Greg is a dual citizen who has a self-managed superannuation fund (SMSF) in Australia. All of the contributions were made by his prior employer, and he has not received any distributions from the Super. While Greg is required to report the superannuation on forms such as the FBAR and Form 8938, since it is a foreign employment pension in a treaty country and because he has not made more than 50% of the contributions, he may qualify for one of the exceptions to having to file Form 3520.

SMSF (Primarily Employer Contributions)

• • • Glenn is also a dual citizen who has a self-managed superannuation fund in Australia, but he has been making significant contributions over the past few years, and his contributions exceed more than 50% of what his employer has contributed. Glenn will have to file the Form 8938 and the FBAR to report the self-managed super, but may also have to file a Form 3520 and 3520-A to report ownership of a foreign trust, unless one of the exceptions, exclusions, or limitations applies.

Treaty Election to Treat Superannuation as Social Security

• • • Gabriel is a lawful permanent resident who has a very large superannuation in Australia and receives distributions. Gabriel was convinced to exclude his superannuation from FBAR and Form 8938 as well as excluding it from his income — by making a treaty election claiming that the superannuation is a foreign Social Security and not pension. In general, the IRS does not accept this position and one of the main tax professionals who promoted this position was recently indicted and convicted for tax fraud, so taxpayers who made this type of treaty election may want to consider whether they want to retrace their steps, unwind prior year treaty elections, and not make the treaty election going forward. 

Mortgage Offset Account

• • • Gene is a dual citizen of the United States and Australia and still maintains various rental properties in Australia. He owns them individually and has set up various mortgage offset accounts to reduce his interest on the loans he took for the properties. In general, mortgage offset accounts do generate reportable interest income — even if it is not paid directly to the taxpayer —  and the account is reported on forms such as the FBAR and Form 8938.

Mutual Funds/ETFs

• • • Grant is originally from Australia but currently resides in the United States on a work visa. He has several equity investments in Australia, including mutual funds and ETF’s which he owns in an investment account. Since the value of these funds exceeds several $100,000, Grant will have to not only file the FBAR and Form 8938 but may also have to file Form 8621 to report the funds as PFICs.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.