Common IRS International Tax Forms – Golding & Golding Tax Lawyers
- 1 Be Careful What You Read
- 2 FBAR (FinCEN 114)
- 3 Form 8938
- 4 Form 3520
- 5 Form 3520-A
- 6 Form 5471
- 7 Form 5472
- 8 Form 8621
- 9 Form 926
- 10 Form 8865
- 11 Additional International Tax General Penalties
- 11.1 Fraud Penalties imposed under IRC §§ 6651(f) or 6663
- 11.2 A Penalty for Failing to File a Tax Return imposed under IRC § 6651(a)(1)
- 11.3 A Penalty for Failing to Pay the Amount of tax shown on the return under IRC § 6651(a)(2)
- 11.4 An Accuracy-Related Penalty on Underpayments Imposed under IRC § 6662
- 11.5 Possible Criminal Charges related to Tax Matters include Tax Evasion (IRC § 7201)
- 11.6 A Person Convicted of Tax Evasion is subject to a prison term of up to five years and a fine of up to $250,000
- 12 Getting Back Into Compliance with Offshore Disclosure
- 13 IRS Voluntary Disclosure of Offshore Accounts
- 14 When Do I Need to Use Voluntary Disclosure?
- 15 Golding & Golding – Offshore Disclosure
- 16 The Devil is in the Details…
- 17 What if You Never Report the Money?
- 18 Getting into Compliance
- 19 1. OVDP
- 20 2. Streamlined Domestic Offshore Disclosure
- 21 3. Streamlined Foreign Offshore Disclosure
“Common IRS International Tax Forms” is a summary provided by the International Tax Lawyers at Golding & Golding.
The U.S. Government has made International Tax (and timely filing and reporting International Tax Forms such as FBARs, Form 3520, 5471, 8621, 8938, etc. an enforcement priority).
As such, it is very important that individuals who have offshore or foreign accounts get into compliance as quickly and safely as possible to avoid potentially high fines and penalties.
Be Careful What You Read
As you conduct your research online you will find one fear-mongering website or scaremongering website after the next.
That is not the point of this article, and not a strategy we use at Golding & Golding. The reality is, it is impossible to determine whether you personally will be selected for an IRS audit or examination.
Moreover, even if you are audited, it is impossible to know what level of penalty the IRS will issue against you.
For example, in some audits or examinations the IRS does not even issue penalties, but rather issues a Warning Letter in Lieu of Penalties. The problem is, there is no real way to know what level of penalty you will receive, because there are many factors that are out of your control.
Namely, what type of auditor/IRS Agent were you assigned that is handling your case, and what level of knowledge do they have regarding international tax. In addition, since the IRS agents have leeway to determine what penalty they want to issue, there is a lot of unknown to deal with — if you are audited.
As such, there are some proactive steps you can take to get into compliance once you are ready to make that leap. In the meantime, we want to provide you a summary of some of the more common types of forms you may need to file involving international tax and what the potential penalties made.
FBAR (FinCEN 114)
We start off with the FBAR, because it is one of the IRS International Reporting forms that receives the most amount of press. The FBAR is used to Report Foreign Bank and Financial Accounts on an annual basis.
The form has a relatively low threshold requirement of $10,000. In other words, if you have an annual aggregate total of foreign accounts (including life insurance or retirement funds) that on any day of the year exceeds $10,000, then you are required to report this form. It does not matter if the money is in one account or spread over numerous accounts. And, it does not matter if the account is in your home country of citizenship or if you opened the account before relocating to the United States.
The US government does not look into the semantics that deeply; rather, if you meet the threshold requirement then you have to file the form. Starting in 2017 (to report 2016 maximum balance), the due date coincides with your tax return filing date (including extension).
When it comes to the FBAR, one of the main concerns are the FBAR Penalties.
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Form 8938 is a byproduct of FATCA (Foreign Account Tax Compliance Act). It is a form that is required to be filed with the tax return each year when a person meets the threshold requirements for filing. Unlike the FBAR, which is an electronic form which is submitted directly to the Department of Treasury (The FBAR is not submitted with your tax return), Form 8938 is part of your tax return.
Form 8938 requires you to provide extensive information regarding foreign accounts and specified foreign assets. For example, with the FBAR, reporting is limited to accounts and insurance policies (although those terms can have a very broad meaning). Conversely, with form 8938, the person must report Income — along with assets and accounts.
Therefore, if you were to own stock of a foreign company, that would be considered a Specified Foreign Asset that would need to be reported on a Form 8938 — but would not be reported on an FBAR.
Moreover, with the FBAR, a person is required to report the maximum balance in the account, but is not required to report any income that is generated from the accounts. The 8938 is more depth than that. Rather, with form 8938, a person must report the account balance along with the annual income that is generated from form 8938 accounts or assets.
Additionally, the income must be broken down by type of income earned (such as royalties, dividends, interest, capital gains) and/or whether the income was earned through a custodial or deposit account and/or it was earned through one of the specified foreign assets.
Form 8938 Penalties
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. 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.
A Form 3520 is a relatively benign form, save for the fact that the IRS can issue extensive fines and penalties for failing to report it. The form is used to report the receipt of a foreign gift either from a foreign person, foreign business, or foreign trust distribution.
The threshold requirements for having to report the gift vary. For example, if a person receives a foreign trust distribution, then the distribution must be reported despite any threshold requirement. In sharp contrast, a person would not need to report the receipt of a foreign gift from a foreign person unless the value of the gift exceeds more than $100,000 in either one transaction, or a series of transactions within the same tax year.
Form 3520 Penalties
A Penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. 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.
Form 3520-A is a bit different than form 3520. Form 3520-A is required to be filed by a US person if the US person owns a foreign trust. A foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under section 6048(b).
Each U.S. person treated as an owner of any portion of a foreign trust under the grantor trust rules (sections 671 through 679) is responsible for ensuring that the foreign trust files Form 3520-A and furnishes the required annual statements to its U.S. owners and U.S. beneficiaries.
The problem with this form is that if the owner/trustee of the trust does not report the form, then technically the trust may be subject to fines and penalties, which can be very substantial, depending on the facts and circumstances of the reporting.
Form 3520-A Penalties
A Penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). 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.
Form 5471 is generally used when a person has ownership in a foreign corporation. There are various threshold requirements regarding ownership versus control and voting rights as to when a person has to file, but generally a person will file a form 5471, when they own at least 10% of the foreign corporation.
This can become a serious problem for individuals who own foreign corporations in countries in which the purpose of the foreign corporation is more of an estate planning tool than a business tool. This is very common in many countries that utilize the Sociedad Anonima.
For example, many of our clients in Costa Rica may have formed one or multiple Sociedad Anonimas for the purpose of holding rental property instead of putting the property under their own name, because it eases estate planning transfers. Unfortunately, from a US perspective this type of corporation cannot be disregarded and therefore (even if it is dormant), the 5471 may need to be filed in part or whole.
Form 5471 Penalties
A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. 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.
Form 5472 is a bit different from form 5471. A form 5471 is filed when a US person has an interest, ownership or control in a foreign corporation. A form 5472 is used (generally) when a US corporation has more than 25% ownership by individuals who are not considered US persons.
This is typical when a foreign corporation, or group of foreign investors, come together to create a US corporation wherein in at least 25% of the corporation is owned by non-US shareholders.
These types of businesses are usually created to function solely in the United States regarding US source income and limited liability or tax liability on a bigger scale.
Form 5472 Penalties
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, 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.
IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) is an IRS Form required to be filed by individuals who have any interest in a Passive Foreign Investment Company — whether or not they received an Excess Distribution, as long as they are not otherwise exempt from filing.
Unlike IRS Form 5471, there is no minimum ownership requirement. Technically, even if you have “fractional ownership,” of a PFIC you are still required to file — unless you meet one of the very limited exemptions/exclusions.
Moreover, the mere ownership of Foreign Mutual Funds and other foreign passive investments (that you do not technically own in a PFIC company) requires you to file the form.
The form can be daunting, especially when the filer also has a tax liability in accordance with form 8621.
Form 8621 Penalties
Notwithstanding Excess Distribution calculations, the “main non-numerical” penalty associated with form 8621 is completely unfair (you can read here about the sheer horror of the “Excess Distribution calculation“).
Why? Because technically, while there is no specific numerical penalty included regarding non-filing of Form 8621, a tax return is still considered to be “open” until the 8621 is filed. In other words, the statute of limitations countdown for the IRS to audit your tax return (usually 3 years) does not even begin to tick if the 8621 hasn’t been filed.
*Even if you try to argue the return only remains open as to the 8621, but in reality, the IRS will most likely take you to task as to the whole return. Even if you could convince the agent that a post statute audit should be contained to 8621 issues, the IRS would just need to show some relation from the 8621 to other parts of your return to avoid that issue.
A Form 926 is required to be filed when a person transfers property to a foreign corporation. The purpose of this this is so the U.S. can track assets that are being moved offshore, and help determine (now or in the future) whether those assets have previously been reported for tax purposes in the United States or are not subject to taxation (due to the relocation being deemed a “sale”)
For example, does the asset already have a BIG (Built-in-Gain) or other inherent tax liability that the company may be attempting to circumvent or sidestep by shifting the asset offshore.
Form 926 Penalties
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Form 8865 is similar to a Form 5471, except that the form 8865 is used to report foreign partnership interest, whereas form 5471 is used to report ownership of foreign Corporation. If you know anything about partnerships, you know that the reporting requirements such as basis and proportionate shares is a very complex undertaking. That is because unlike the Corporation which has its own entity, a partnership is not an entity to the same degree that, for example, a corporation is an entity.
As such, as with a partnership the individuals still directly owned the assets, even though they are being owned through the partnership (in other words, there is no entity that distinguishes between the owners and the partnership aside from the “partnership” which is a pass-through for tax purposes, but is reported separately.)
The reporting requirements for a partnership can the intense and therefore it is very important to understand these reporting requirements when submitting a form 8865.
Form 8865 Penalties
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, 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, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Additional International Tax General Penalties
Fraud Penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for Failing to File a Tax Return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for Failing to Pay the Amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on Underpayments Imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A Person Convicted of Tax Evasion is subject to a prison term of up to five years and a fine of up to $250,000
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
Getting Back Into Compliance with Offshore Disclosure
If you have not filed the necessary international tax forms and are worried about the ramifications, fines and penalties by the US government, you may consider getting into compliance with IRS offshore voluntary disclosure.
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 (reduced by any outstanding mortgage) 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.
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