How to Disclose Overseas Assets, Explanations and Examples

How to Disclose Overseas Assets, Explanations and Examples

How to Disclose Overseas Assets

U.S. taxpayers who have ownership or interests in (or signature authority over) foreign accounts, assets, or investments may have an annual international information reporting requirement – or several requirements – depending on which category of accounts they own and the aggregate value of the accounts themselves. While many taxpayers are aware of the foreign account reporting form referred to as the FBAR (Foreign Bank and Account Reporting), there are many different types of international information reporting forms that a taxpayer may have to file, such as FATCA Form 8938 and Form 8621. The reporting of some foreign accounts may be duplicated on many different forms in the same year, and depending on the specific form and the value of the account, the account may need to be reported on one form in one year (Form 5471) but then on one or multiple forms in a subsequent year (Form 8938).

And, while many taxpayers are aware that foreign bank accounts are reportable, the IRS requires more than just foreign bank account reporting. Some common types of foreign accounts include:

      • Current Accounts

      • Savings/Checking Accounts

      • Stock Accounts

      • Fund Accounts

      • Unit Trust Accounts

      • Minor Accounts

      • Life Insurance ‘Accounts’

      • Retirement Accounts

      • Pension Accounts

For some taxpayers who only recently learned about the requirement to report foreign accounts, they can be understandably overwhelming. Therefore, our international tax law specialist team put together an introduction to how this works. Let’s review the basics of foreign accounts by going through the following analysis:

Foreign Account Reporting vs Income-Generating

It is very important to remember that foreign account reporting is not the same as the taxation of income generated from foreign accounts. Even if a person has foreign accounts that do not generate any income, the foreign accounts are still reportable on international information reporting forms published by the IRS. While many different types of accounts need to be reported, there are also many different forms that the taxpayer may have to file to report these accounts. Sometimes, the same asset will be reported on multiple accounts in the same year. Likewise, sometimes an account may contain different types of investments within the account so that some of the investments have to be parsed out and reported separately from the main account (such as mutual funds parsed out from an investment account), as well as the main account having to be reported on other forms as well.

Which International Tax Forms to File?

After a taxpayer takes inventory of the different types of foreign accounts and assets they have, the next issue is to assess which international information reporting forms may be required to be filed. There are many different types of foreign tax forms that the taxpayer may have to file depending on the category of accounts and assets, along with their overall value. Some forms have a lower threshold, such as the FBAR and other forms have a higher threshold, such as Form 8938 for joint filers who are deemed to be ‘residents of foreign countries.’

Some of the more common international information reporting forms include:

      • FBAR

      • Form 8938

      • Form 8621

      • Form 3520

      • Form 3520-A

      • Form 5471

      • Form 8865

While there are some other international information reporting forms that the taxpayer may have to file, such as Form 926 — and other forms that are not considered international forms but may impact U.S. persons who have foreign businesses (such as Form 8300), the seven forms listed above are there more common international information reporting forms that a taxpayer may have to file to report their foreign accounts and assets,

Let’s look at some common examples to help put this all into perspective.

Foreign Account and Form Examples

Here are some common examples for taxpayers who have foreign investments. Noting, these are just illustrative examples and not to be relied on by individuals who have their own reporting requirements.

Taxpayers who have foreign accounts and have questions should speak with a professional to assess their overall requirements because sometimes nuances in ownership can impact the reporting — and sometimes exceptions may apply that could eliminate the reporting requirement. For these examples, please assume that the taxpayer is simply a U.S. person and does not qualify for any exception to having to file such as a closer connection exception or treaty election.

Bank Accounts

Bank accounts do not require extensive reporting beyond the maximum value in the year it is being reported. All types of Bank Accounts are reportable:

      • Current Account

      • Hybrid Account

      • Dormant Account

      • Zero Balance Account

Example: Frank worked in Canada. He has three bank accounts. The value of the bank accounts is $375,000 and no income is generated. Frank is required to report these accounts on the standard reporting forms.

Securities Accounts

Securities accounts can vary extensively depending on what types of securities are contained within the account very typically karma if it just contains stocks the reporting is relatively straightforward. But, if the securities account includes funds such as mutual funds or ETFs, then the reporting can become more complicated because oftentimes the funds have to be parsed out (especially when the securities account contains a hybrid of both mutual funds and ETFs and non-pooled funds such as stocks/equities).

No Pooled Funds (ETFs/Mutual Funds) Example

      • Example: Mary previously lived overseas and opened a Vanguard equivalent stock account worth $600,000. The stock account has several different securities in it, but it does not contain any mutual funds or ETFs. Mary’s can usually follow the standard reporting protocols.

Pooled Funds Example

      • Example: Jean has an investment account overseas that contains both stock and mutual funds. The total value of the account is $800,000 and the mutual funds are valued at $300,000. Here, Jean will have to report the account on multiple forms, including additional forms specifically for the mutual funds. This  can get vert complicated depending on whether there are any distributions or excess distributions slash redemptions for the mutual funds.

Employment Pension Account (Treaty vs Non-Treaty)

Taxpayers who have foreign pension accounts are required to report the accounts as well. It does not matter whether their pension account is in a treaty country or not when it comes to having to report the accounts – although it can impact the extent of the reporting because there are certain exceptions for PFIC reporting in treaty countries versus non-treaty countries.  Also, there are various exceptions under different revenue procedures. What is also important to note, is that the tax implications of having an employment pension will vary based on whether it is a treaty country or a non-treaty country.

Treaty Country Example

      • Example :Michelle has $2M in a foreign employment pension in a treaty county. She has not started taking distributions yet and the employer made more than 50% of the contributions. This type of pension is typically subject to standard reporting.

 Non-Treaty Country Example

      • Example: David has $2M in a foreign employment pension in a treaty county that contains funds. He has not started taking distributions yet and the employer made more than 50% of the contributions. This type of pension is typically subject to additional reporting. And, since it is not a treaty county, there may be additional reporting as well for funds/unit trusts associated with the policy.

Personal Pension/Retirement Account or Scheme

A personal pension account is essentially an investment account with the term pension or retirement used as a ‘wrapper.’ These types of investments come in all different flavors. Some are rolled over from employment pensions and others have been personal pensions since the outset. Depending on the type of investment and the country of source will impact the reporting requirements.

In addition, various revenue procedures and proposed regulations may impact the reporting and tax (for personal and employment pensions):

      • Rev Proc 2020-17;

      • Rev Proc 2014-55

      • 2024 Proposed Trust Regulations

Foreign Life Insurance

When a person has ownership of a foreign life insurance policy that has a surrender value, then the insurance may be reportable on multiple forms. Most insurance policies can be reported under standard procedures, but issues involving mutual funds vs mirror funds, premium payments, and bonus payments or payouts may impact the reporting and tax implications.

      • Example: David owns two LIC Policies in India, a Tokio Marine policy in Malaysia, and two AIA policies in Singapore. David may have significant reporting requirements, as well as additional ‘excise tax’ reporting requirements.

Penalties for Late and Unfiled Information Returns

When it comes to reporting foreign accounts, taxpayers must try to remain compliant or get compliant as soon as they realize they are out of compliance. That is because oftentimes the Internal Revenue Service issues fines and penalties against taxpayers who are not compliant. The type and amount of penalties taxpayers may be issued varies based on the value of the unreported accounts or assets in which form is delinquent. Making matters worse is that most international information return penalties are automatically accessible and do not follow the typical deficiency procedures. Essentially, that means that the first notice the taxpayer will receive that they have a penalty is when they have already been assessed the penalty instead of going through the typical deficiency procedures. This automatically puts the taxpayer on the defensive.

Late Filing Penalties May be Reduced or Avoided

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

Current Year vs Prior Year Non-Compliance

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

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

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

Need Help Finding an Experienced Offshore Tax Attorney?

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

Golding & Golding: About Our International Tax Law Firm

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

Contact our firm today for assistance.