FATCA Reporting 2017 – 10 Things You Need to Know for U.S. Tax Compliance
- 1 Worldwide Income
- 2 You Must have An Interest in the Account for FATCA
- 3 The Thresholds for filing vary
- 4 Specified Foreign Assets Apply
- 5 Foreign Real Estate
- 6 You Have to Report the Income as well
- 7 Form 3520
- 8 Form 3520-A
- 9 Foreign Corporation or Foreign Partnership (5471 or 8865)
- 10 Passive Foreign Investment Company (PFIC)
- 11 IRS Offshore Voluntary Disclosure
- 12 Golding & Golding – Offshore Disclosure
- 13 The Devil is in the Details…
- 14 What if You Never Report the Money?
- 15 Getting into Compliance
Under the current state of the law, FATCA has become a harsh reality for millions of people.
FATCA is the Foreign Account Tax Compliance Act, and it requires both individuals and foreign financial institutions worldwide to report foreign account and “Specified Asset” information to the United States.
While the law has good intentions, it is abhorred by many — and for some, rightfully so.
Why? Because there are many individuals who reside overseas and have no other relation to the United States other than being born as a U.S. Citizen (accidental American) or relocated from the United States to a foreign country many years ago — and then had no further interaction with the United States, who are now caught in the FATCA Matrix.
Worse yet, in order to enforce FATCA, many Foreign Financial Institutions are finding it easier to simply close and/or freeze U.S. Account Holder accounts than to take the time to properly report any individuals who may be considered a U.S. person.
This is causing major disruptions for individuals residing overseas, and making it nearly impossible to exist as a foreign resident and U.S. Citizen/Legal Permanent Resident.
To that end, we will provide a brief summary of things you need to know regarding FATCA — hopefully to help relieve some of the stress, and bring you back to reality (after all those rabbit holes you dug through, and/or fear mongering websites you landed on)
The United States is one of only a handful of countries on the planet the taxes individuals on their worldwide income. What does that mean? It means that whether or not you reside in the United States or in a foreign country, you are required to report all of your US income as well as foreign source income on your U.S. Tax Return.
It also does not matter if the income you earn is tax exempt in a foreign country (PPF or Passive Income earned in many countries), or whether the income you earn in a foreign country was already taxed (although a Foreign Tax Credit or Foreign Earned Income Exclusion may apply, see below). While you may be able to obtain a credit or exemption for the taxes you paid, or income you earned in a foreign country – you are still required to report the income on your US tax return.
Moreover, it should be noted that the foreign passive income you earned is also required to be identified on the FATCA Form 8938 (thresholds vary based on their U.S. Residency Status and/or marital and filing status)
You Must have An Interest in the Account for FATCA
Another similar form is called an FBAR (Report of Foreign Bank and Financial Account Form). It is a form that is required to be filed by any US person who has ownership, joint ownership, or signature authority over a foreign account or group of accounts that in aggregate had more than $10,000 on any day of the year.
With FATCA Form 8938 (required to be filed by certain taxpayers), the person must have an interest in the account. Therefore, if you merely have signature authority over an account, chances are you may not need to file the form. Moreover, if your name is on the account but you do not have any interest in the account — that is something you should discuss with an experienced international tax attorney before completing the form.
The Thresholds for filing vary
With the FBAR, the $10,000 threshold requirement does not vary. In other words, whether or not you are single, married filing jointly, or reside outside of the United States — the $10,000 threshold is still the same.
The FATCA Form 8938 is different. Not only must you have an interest in the account, but the threshold requirements vary — depending on whether you reside in the United States or in a foreign country, and whether you are married or single.
For example, if you are single or married filing separate and reside in the United States, then the minimum threshold requirement is $50,000 on the last day of the year or $75,000 on any day of the year (if you have less than $50,000 on the last day of the year). In sharp contrast a person filing married filing jointly and residing overseas may have a minimum threshold requirement of $400,000.
Specified Foreign Assets Apply
Unlike the FBAR, which is mainly focused on items such as accounts an insurance policies, FATCA Form 8938 is more comprehensive. It requires reporting for ownership of certain assets, such as an interest in a business or foreign corporation. The level of ownership of the foreign business, partnership, or corporation is important — because you don’t want to duplicate file the form 8938 and other forms (such as 8938 and 5471 or 8621).
Foreign Real Estate
If a person owns foreign real estate, whether or not they report the real estate will generally be determined by whether it earns any foreign income and/or whether the person is making interest or tax payments that they would like to deduct on their US tax return.
Foreign real estate is not directly reported on a FATCA Form 8938. If a person owns an interest in a foreign corporation or business that owns real estate, the ownership interest in the foreign business or corporation is subject to FATCA reporting — but the real estate is not separately identified on its own 8938.
You Have to Report the Income as well
A form 8938 has multiple parts to it, but the introductory part asks the taxpayer to identify whether the accounts or assets listed in the 8938 (or 8938 continuation form) generates any income. If it does, the individual is required to identify whether the income is capital gains, interest income, dividend income or any other type of income and how much was earned from those accounts.
(This information will also be included on other forms such as his or her Schedule B, Schedule D, Schedule E, or other tax schedule)
When a person receives a foreign gift or foreign trust distribution, they may be required to report it on a form 3520. A person has to report the receipt of a foreign gift if it exceeds $100,000 in either a single transaction or series of transactions. They have the report the receipt of a foreign gift from a corporation when it exceeds roughly $15,000, and they have to report any trust distribution.
If a is required to report the form 3520 they may not need to file a form 8938 for the same money.
When a person owns a Foreign Trust, they are required to file a form 3520-A. if a person is required to file a form 3520-A for particular foreign trust, they are not required to file a Form 8938 for the identical trust ownership.
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 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/or 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
IRS Offshore 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. Unlikes 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.
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