Disclosing Foreign Accounts that Pre-Date U.S. Residency or Citizenship
The Article, “Disclosing Foreign Accounts that Pre-Date U.S. Residency or Citizenship” was authored by Golding & Golding, International Tax Lawyers.
This type of question is one of the most common types of questions we receive at our law firm.
As an international tax firm the practices exclusively in the area of IRS Offshore Voluntary Disclosure, we understand that once a client learns about the exceedingly high fines and penalties they may incur for having unreported foreign accounts, it can be intense.
With that said, a basic understanding of how the reporting works may help you in preparing compliance for now or in the future.
FBAR & FATCA
Not everybody has to report foreign accounts for specified foreign assets. It is generally limited to U.S. persons, and that usually falls into three (3) categories:
- U.S. Citizens
- Legal Permanent Residents
- Foreign Nationals who meet the Substantial Presence Test
If you fall into one of these three (3) aforementioned categories, it does not matter where you live, or where you reside — you are considered a U.S. Person for income tax purposes and that includes proper reporting of both the FBAR and FATCA Form 8938.
The IRS requires that U.S. persons who maintain foreign accounts, report their foreign accounts to United States government annually and sometimes on various different forms. The most common form (because it has the lowest threshold requirement and some of the highest penalties) is the FBAR (Report of Foreign Bank And Financial Accounts)
The threshold requirement for this form is relatively small, being an annual aggregate total balance of all foreign accounts combined, that exceeds $10,000 on any day of the year.
This is really not that high of a threshold, especially if you are in countries such as the UK in which the exchange rate leans in favor of the foreign country (aka 8,000 Sterling Pounds is typically more than USD $10,0000 in 2017).
Accounts that Pre-Date U.S. Residency or Citizenship
There appears to be some bad information online regarding this issue, so we would like to clarify for you.
When it is time for you to file your 2017 FBAR by April 2018, you take a snapshot picture of your accounts, investments, corporate holdings, etc. to determine what your value is.
Assuming that you have more than $10,000 in qualifying FBAR accounts, you have to report all of the accounts. It does not matter if the account was opened before you received your US person status or is dormant. In other words, the IRS does not care if you have $3 million offshore — but that the accounts were opened five years before you became a US person.
The reality is, in April 2018 when you are preparing your 2017 FBAR as a U.S. Person, you will evaluate all the open accounts you have (dormant or active), determined the total value is of all the accounts, and report all of the accounts individually on the proper form.
Estate Tax is a Catalyst for FBAR & FATCA
Why is FBAR and FATCA Reporting so Important to the IRS?
It is important to understand that when a person is considered a U.S. person for estate tax purposes (which generally includes people who are covered under the three above-referenced categories), their entire estate become subject to US gift and estate tax laws – not just their U.S. assets.
As such, the IRS wants to know what your global/worldwide value is in money, investments, and assets during your lifetime. Moreover, there is no reporting exemption in place for people who accumulated their ‘foreign’ prior to become a US. Person. In other words, the IRS evaluates your total worldwide assets both prior to, and subsequent to becoming a US person (once you are a U.S. Person) in order to determine what your estate tax value is. And, one of the best methods for the IRS/U.S. Government to accomplish this is through FBAR and FATCA.
The reason we bring this to your attention is because it is important to understand that a big reason why the IRS wants to know your worldwide value is that when you die, the IRS want to be able to evaluate all of your assets, accounts, etc. the IRS does not parse your value into pre-citizenship/residency vs. post-citizenship/residency — or other related types of breakdown. And, if the IRS believes you were willful in withholding or ‘hiding’ this information during your lifetime, the IRS is going to penalize you heavily.
This is one underlying reason why the penalties are so high for seemingly innocuous missteps.
Getting into Compliance
If you are currently out of compliance with IRS tax law, you may be subject to exceedingly high fines and penalties. With that said, there are generally many different methods for getting those penalties limited, reduced or even avoided — with the primary vehicle being the IRS offshore disclosure programs.
Golding & Golding, A PLC
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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. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.