Australia & U.S. Tax Lawyers – FATCA, FBAR, Investments, Superannuations, Trusts & Gifts
- 1 Tax Basics – Australia
- 2 Foreign Tax Credits
- 3 Foreign Earned Income Exclusion
- 4 Superannuation Funds
- 5 Franking Credits
- 6 Rental Property
- 7 General Reporting Requirements
- 8 FATCA and Foreign Account Reporting
- 9 FATCA Form (8938)
- 10 Foreign Gift Form (3520)
- 11 Foreign Corporation or Foreign Partnership (5471 or 8865)
- 12 Passive Foreign Investment Company (PFIC)
- 13 Foreign Trust (3520-A)
- 14 Foreign Real Estate Income
- 15 Golding & Golding
- 16 IRS Voluntary Disclosure of Offshore Accounts
- 17 When Do I Need to Use Voluntary Disclosure?
- 18 Golding & Golding – Offshore Disclosure
- 19 The Devil is in the Details…
- 20 What if You Never Report the Money?
- 21 Getting into Compliance
- 22 1. OVDP
- 23 2. Streamlined Domestic Offshore Disclosure
- 24 3. Streamlined Foreign Offshore Disclosure
- 25 4. Reasonable Cause Statement
Australia is one of the most influential countries in the world.
It has an extraordinarily large expat community, including a large population of individuals who are either U.S. citizens that relocated to Australia, or Australian citizens who either obtained a Green Card, U.S. Work Visa, or relocated to the United States and are now subject to U.S. Tax.
As one of the few international tax law firms in the world that focuses exclusively on IRS Offshore Voluntary Disclosure, we have represented numerous individuals worldwide who have Australian-U.S. tax related issues.
With the introduction of FATCA (Foreign Account Tax Compliance Act), along with the renewed interest by the United States in enforcing FBAR Reporting (Report of Foreign Bank and Financial Accounts) — as well as other related international reporting forms (3520, 3520-A, 5471, 5472, 8865, and 8621) – it is absolutely crucial that you remain in U.S. tax compliance.
The following summary is a basic analysis of various Australia – U.S. Tax related issues.
This is not intended on tax advice, or to rely upon to avoid penalties or take a tax “position.” It is for information purposes only.
Tax Basics – Australia
Australia is similar to the United States, in that it taxes individuals at a progressive tax rate on all types and sources of income. Unlike many Asian countries for example, which do not tax various forms of passive income — Australia taxes its citizens and permanent residents on all types of income.
Unlike the United States, Australia is RBT (Residence-Based Tax) and not CBT (Citizen-Based Text). As such, if you are a Australian person for tax purposes and relocate the United States, you will file a nonresident tax return similar to many other countries.
Foreign Tax Credits
If you are subject to U.S. tax and work in Australia and/or earn income and pay tax on your Australian Income, then you would receive a Foreign Tax Credit for the majority of taxes you pay in Australia when you complete your U.S. tax return. For example, if you reside in the United States and you earn $20,000 of passive income in Australia (excluding more complex issues involving franking credits and related investment issues), you would owe tax in Australia when you file your non-resident tax return.
Likewise, if you are in the United States as a U.S. citizen, Legal Permanent Resident, or Foreign National subject to U.S. tax because you are in the United States on a work visa (H1-B, L-1, E-2 etc.) and meet the Substantial Presence Test, you would be required to report this $20,000 on your US tax return as well. But, when it comes time to pay your U.S. tax, you would receive a Foreign Tax Credit against the taxes you already paid in Australia. Therefore, you do not pay double tax on this income.
It should be noted that depending on what your tax rate was in the United States, coupled by the total amount of your U.S. income, you may not be entitled to use the full credit — but you can carry it forward to subsequent years.
Example: Let’s say you are filing Australian tax returns as a nonresident because you reside in the United States. You earned $100,000 of income in Australia and pay $30,000 of income tax in Australia – you do not have to pay that same $30,000 again in the United States.
Rather, you report all of your income on your U.S. tax return, and then either make a claim for a Foreign Tax Credit (or, if applicable, the Foreign Earned Income Exclusion if you meet the requirements) and/or a hybrid of both. This way, the $30,000 you already paid on the income you earned in Australia will be credited to the U.S. tax when you report your foreign income in Australia to the United States.
If you paid more in Australia then you would have paid in the United States, then you can carry the remainder of the credit forward to be used in subsequent years in which you have a tax liability from Australia (in other words, you cannot use the tax money you paid in Australia to offset taxes due on US source income in years you do not have any Australian income).
If you paid less in Australia than you would have paid in the United States, you will pay the difference in the United States. If you paid the identical amount, then congratulations – nice tax planning.
Foreign Earned Income Exclusion
If you qualify for the Foreign Earned Income Exclusion, you will qualify to have $100,000 of your Australian income, along with a portion of your foreign housing excluded from U.S. tax. For example, if your salary was $110,000 in Australia, and you meet either the Physical Presence Test or Bona-Fide Residence test, you would be entitled to exclude $100,000 of the income from your US Income.
Two important facts: You still have to report the income on your U.S. tax return, but you would thereafter claim the exclusion by filing form 2555 along with your tax. In addition, even though you only have $10,000 of income remaining, under relatively recent changes in the law, that $10,000 (along with any other income unless subject to lower taxes such as qualified dividends) will be taxed at the income bracket tax rate you would have been taxed at.
For example, if you have any additional $50,000 of income, then your total income would’ve been $160,000. Even though there is only $60,000 of remaining income, you are taxed as if you earned $160,000 (so you will be taxed at the progressively higher tax rate).
Superannuation funds are very common in Australia and required for most, if not all individuals working in Australia. It is similar to a retirement fund and the “super” as it is referred to is basically a structure of investments in which the Australian government wants individuals to plan for retirement. Under most circumstances, the employer and the employee deposit money into the super and it grows tax free.
It cannot be withdrawn until retirement age, and there are many other “super-specific” factors you may need to consider which require you to first speak with an Australian tax attorney regarding the impact of the Super on your Australian Taxes.
With respect to U.S. Tax related issues, the following facts are very important:
Superannuation funds should be reported on an FBAR form each year, if on any day during the year, your annual aggregate total of all foreign accounts exceeds $10,000. Even though it is a retirement type investment, you do have an account number — and therefore it should be reported.
The failure to file a form 8938 may result in significant fines and penalties. As such, it is probably in your best interest to file this form as well to report your Superannuation Fund. There is some confusion as to whether theSsuperannuation may be considered a foreign trust and therefore you would file a form 3520-A (instead of the form 8938) but to play it on the safe side, in most situations filing a form 8938 will be sufficient.
Your Superannuation is Probably not a Trust
The rules regarding the complexities of whether superannuation is a foreign grantor trust work or non-exempt employee trust is far beyond the scope of this introductory article. Other than to say, if you are able to obtain the necessary information from your superannuation fund to make this determination in accordance with Internal Revenue Code section 402 et seq. then by all means you should.
Presumably, your Superannuation reporting requirements include an FBAR and FATCA Form 8938. With that said, if your superannuation fund has been funded primarily by the employee (you) and not the employer, then it is different. In that case, once the trust is funded in excess of 50% by employee contributions, the trust must be split, and the portion involving the employee’s contributions would not be considered a nonexempt employee trust and thus the employee and/or Trusts may be required to report a form 3520-A and/or form 8621.
Unlike a 401(k) in the United States, the U.S. government does not acknowledge tax-deferred treatment of a Super. Therefore, if your foreign employer contributes money to the superannuation fund, then it should be reported as salary on your U.S. Tax Return. In addition, any contributions made from the employee are not deductible.
If a person receives distributions from the superannuation fund, than those distributions are taxed along with their regular income. If possible, the taxpayer may try to obtain qualified dividend treatment for any distribution that is considered a foreign qualified dividend.
Annual Fund Growth
This is where it gets very sticky.
In reality, the superannuation fund is mandated by the government and therefore should receive some form of 401(k) treatment (aka deferred tax). Unlike a Canadian registered retirement investment fund (RRIF) or registered retirement savings plan (RRSP), which can receive deferred treatment, the United States does not outright state that a Superannuation Fund is the same as a 401(k) — the tax treaty is silent on the superannuation fund.
The general understanding amongst tax attorneys is that if a person is in the top 20% of earners and is considered a Highly Compensated Employee (HCE), then the annual growth – even though not distributed – should be included in the taxpayer’s annual income.
In reality, it is not so bad (aside from the bad taste of paying tax on income you cannot presently touch) since the tax will increase the your basis in the super, and therefore when the person receives distributions in the future, he or she will have a higher tax base (and presumably less tax).
We will not spent too much time on franking credits, other than to explain that they are credits you receive as an Australian resident for certain passive income derived from Australian companies. The general method of franking credits generally goes like this:
A company in Australia may $1,000.00 in dividends to the taxpayer. In addition, the company may have already paid certain taxes to the Australian government on behalf of the individual. As a result, the individual may not owe any additional tax on the income year she earned dividends. Moreover, the taxpayer maybe in a lower tax rate and therefore be entitled to a refund as a result of there being “franking credits” than there is tax liability.
The question we receive often from our clients with Australian income is whether they can claim this credit as a foreign tax credit in the United States. The answer is probably no.
Why? Because you did not actually pay the tax. Rather, the company paid the tax and passed through the tax savings to you – thereby reducing your Australian tax liability for the dividend. You did not actually reach into your pocket and pay the tax; thus, the IRS will presumably not allow you to take the credit, since you did not actually pay the tax from your own money.
It is similar in concept to Taiwanese tax imputations, and/or dividend payments made on behalf of individuals with Central Provident Funds in Singapore.
If you own rental property in Australia, then you must report the income in the United States. With that said, you get the same deductions that you would ordinarily receive in Australia under US tax return by way of schedule E.
You report gross income, along with all the deductions you took abroad for your rental property. In addition, you are also entitled to depreciation (which is handled differently than in Australia). Depreciation is a rather complex idea, which can be simply stated as follows – if you own a rental property and you can distinguish between what portion of the property is land, and what portion of the property the structure – then you can depreciate the structure over a 40 year period.
For property located in the United States – depending on the classification – you may be able to deduct it over a shorter period of time such is 27.5 years or 39 years (leading to more deductions quicker), but when it comes to foreign property, it must be depreciated over 40 years. In other words, you have to extend time of the depreciation over a longer period, so that you can depreciate less each year then you could for a property located in the United States.
General Reporting Requirements
Depending on the type of assets, income, investments, etc. you maintain overseas, you may have several (read: Tedious) reporting requirements.
The following is a brief summary of some of the more “basic” reporting requirements:
FATCA and Foreign Account Reporting
United States requires individuals to report there Foreign accounts, specified assets and other investments to the United States in a variety of different circumstances. The most common is the annual FBAR statement – which is a report a foreign bank and financial account form.
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives, and FATCA (Foreign Account Tax Compliance Act).
Penalty: The penalty ranges from a Warning Letter, to $10,000 per account, per year (non-willful) to 50% value of the account per occurrence (willful)
Golding & Golding Resources: FBAR Basics, FBAR FAQ, FBAR Penalty Guide.
Beyond the FBAR, there are also many other reporting requirements to keep in mind. There summarized below for you (this is not an exhaustive list but rather a representative list of what the majority of individuals may have to report)
FATCA Form (8938)
FATCA is the Foreign Account Tax Compliance Act. For individuals, it requires the reporting of financial accounts and certain specified foreign assets (ownership in businesses, life insurance, etc.). There are different threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.
Penalty: The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return. Total Penalty can reach $60,000
Golding & Golding Resources: Form 8938 FAQ; Form 8938 Penalties
Foreign Gift Form (3520)
If you receive a gift or inheritance from a foreign person that exceeds $100,000 either in a single transaction, or a series of transactions over a year, you are required to report the gift on this form. You have to file this form, even if you are not required to file a tax return (although it is normally filed at the same time as your tax return).
Penalty: The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
Golding & Golding Resources: Form 3520 Penalties
Foreign Corporation or Foreign Partnership (5471 or 8865)
The rules are somewhat different for these two forms, but essentially the same (with the 5471 being much more commonplace for U.S. investors). If you own at least 10% ownership in either type of business, you are required to report the information on either a form 5471 or 8865. Both of these forms require comprehensive disclosure requirements, involving balance statements, liabilities, assets, etc. Moreover, the forms need to be filed annually, even if a person does not have to otherwise file a tax return
Penalty: The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Golding & Golding Resources: Form 5471 Penalties
Passive Foreign Investment Company (PFIC)
One of the most vilified type of financial assets/investments (from the U.S. Government’s perspective) is the infamous PFIC. A PFIC is a Passive Foreign Investment Company. The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment and income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.
As a result, the IRS requires annual disclosure of anyone with even a fractional interest in a PFIC (unless you meet very strict exclusionary rules)
Penalty: The Penalties for not filing an 8621 run concurrent with the 8938 penalties (see above).
Golding & Golding Resources: Form 8621 Penalties; PFIC Form 8621 Excess Distribution Calculation
Foreign Trust (3520-A)
A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore. While there are many people who may operate illegally in this fashion, there are various legitimate reasons why you would be a trustee or beneficiary of a Foreign Trust (Your cool grandma really loves you, and placed $5 million in a foreign trust for you overseas). Form 3520-A is a relatively complex form, which must be filed annually by anybody that owns a foreign trust.
Penalty: The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
Golding & Golding Resources: Form 3520-A Foreign Trust Penalties
Foreign Real Estate Income
Even if you are earning rental income from property that is located outside of the United States, you still must report the income on your U.S. taxes (even it is exempt from tax in the foreign country). Remember, United States taxes individuals on their worldwide income. Therefore, the income you are earning from your rental property(s) must also be included on your US tax return.
A few nice benefits of reporting the income is that the United States allows depreciation of the structure – which many foreign countries do not allow. Moreover, you can take the same types of deductions and expenses that you otherwise take the property was located in the United States.
Penalty: Varies, depending on the Nature and Extent of the non-disclosure.
Golding & Golding Resources: Foreign Real Estate Income FAQ
Golding & Golding
This is just a very basic list of information you should be aware of if you are required to file a US tax return and/or report for accounts and you have Australian income, investments, assets or gifts.
This is by no means comprehensive, and each individual will have their own unique set of facts and circumstances which usually will require an analysis by an international tax letter.
At Golding & Golding we limit our entire tax law practice to IRS offshore voluntary disclosure. We do not handle tax planning, but rather focus our energies on helping individuals who have fallen out of tax compliance with the United States to get back into tax compliance – or into tax compliance for the first time.
The following is a summary of what the different options are for you if you are out of compliance:
IRS Voluntary Disclosure of Offshore Accounts
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.
4. Reasonable Cause Statement
When a Person, Estate, or Business is out-of-tax compliance for failing to report Foreign Income and/or Foreign Assets, the applicant has relatively few options for timely and safely getting into tax and foreign reporting compliance — before fines and penalties are issued.
While the most common options include the Offshore Voluntary Disclosure Program or the Streamlined Offshore Disclosure Program, there is another alternative. It is called making a Reasonable Cause submission.
Reasonable Cause Process
An individual should never attempt offshore disclosure without the assistance of a qualified attorney. With that said, it is even more important to ensure that if you are even considering a reasonable cause submission, that you do so only with the help of an attorney. That is because only with an attorney do you receive the benefit of the attorney-client privilege.
Unlike the Streamlined Program or OVDP where there are strict procedures to be followed, a reasonable cause submission is different. It should be noted that a person can submit a reasonable cause application for any number of different reasons; it is not limited only to offshore money and reporting foreign accounts. It should also be noted that there are potentially high risks and penalties associated with this Reasonable Cause process, so you have carefully weigh your options.
With a reasonable cause submission, the attorney will carefully evaluate and analyze the facts and circumstances of your case in detail. He or she should sit down with you either in person or via teleconference if you are non-local and assess the pros and cons of the potential submission in order to determine what the benefits and detriments may be to a reasonable cause disclosure. Thereafter the attorney will amend the returns, prepare the necessary forms, and draft a persuasive Reasonable Cause Letter.
At Golding & Golding, we are Tax Attorneys (with Masters of Tax Law) and Enrolled Agents credentialed by the IRS (Highest Credential awarded by the IRS), so we can handle your entire submission (Taxes, Legal, and Audit Defense) in-house, for a flat-fee.
Reasonable Cause Examples
If you were completely non-willful in your failure to disclosure and were unaware that there was any reporting requirement, then the thought of paying any penalty may sound absurd and you may consider Reasonable Cause as an alternative option.
Reasonable Cause is determined on a Case by Case basis in accordance with your specific facts and circumstances.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)