Survival Guide to IRS Foreign Reporting Rules & Requirements
Considering the IRS has taken to issuing gargantuan-sized penalties against U.S. Persons (individuals and entities) who are not offshore/foreign account compliant — you would think the IRS would issue a guide to assist U.S. Persons with getting compliant.
Survival Guide to IRS Foreign Reporting Rules & Requirements
By “guide,” we do not mean a 50-page IRS instruction manual or publication. Oftentimes, these manuals and publications are dense, and altogether sleep-inducing.
We mean a summary of the of foreign account compliance tips, traps, and tricks to get you through your reporting responsibilities.
Foreign Accounts Compliance Lawyers – Golding & Golding
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure (Foreign Account Compliance) submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
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Foreign Account Compliance & Offshore Reporting
Whether you just became a U.S. Person or have been out of compliance for several years, we wanted to provide you with an “Introductory IRS Survival Guide” for Foreign Account Compliance.
*This guide is by no means a comprehensive do-it-yourself manual. It is simply designed to assist you with getting a baseline understanding of what you may need to report — and help you weed through the horrible advice you may find online.
Survival Guide for IRS Offshore Reporting
Here are some tips to help you survive the IRS labyrinth that is “Foreign Account Compliance.”
Are You a U.S. Person?
If you are U.S. person, you become subject to foreign account compliance on a worldwide basis. That means that as part of your U.S. tax return, you may have to report your foreign accounts, assets, investments, and income.
U.S. Person includes:
- U.S. Citizen
- Legal Permanent Resident
- Foreign National who meets the Substantial Presence Test
You may additional have to file several International Informational Reporting forms (see below).
When did You Become a U.S. Person?
The moment you became a U.S. Person is the time from when you have to start reporting your foreign accounts.
A few common myths to dispel:
You Live outside the United States
Even if you reside outside the U.S, you still have to report foreign accounts (although you may be entitled to a tax credit or exclusion).
Accounts Pre-Date U.S. Status
When you report the foreign accounts and assets, you have to report all the accounts/assets at that time — even if you had the accounts before you became a U.S. person.
The Money is Not Yours
Depending on which forms you may have to file, and whether or not you have an “interest” in the account or asset, will impact your reporting and filing responsibilities.
What Types of Assets do you have?
If you have a foreign account, assets, or investments — the IRS has a form for you.
Before completing any international reporting forms, we recommend that you parse out each type of account or asset you have, for each year of reporting, with the value of each account or asset. (using the proper exchange rate for that specific reporting year.)
Do you own the Money, Accounts, or Assets?
Even if you do not “own” the account or asset, or technically the money does not belong to you — you still have to report the accounts.
A few typical examples
- Signatory accounts
- Joint accounts
- Employment accounts
Frequently Required International Informational Reporting Forms
Here are some of the more commonly required forms:
FBAR (FinCEN 114)
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
This form is used to report “Specified Foreign Financial Assets.”
There are four main thresholds for individuals is as follows:.
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
How do you Report Foreign Accounts?
Each form has its own set of requirements, and some forms are far worse than others. For example, the FBAR (FinCEN 114) only requires some basic information, along with the maximum balance in the account.
Conversely, Form 5471 is a full-on reporting form, which requires income, assets, liabilities, equity, etc. The IRS estimates that the form will take upwards of 30-hours to complete.
When do you Report the Foreign Accounts & Assets?
This is very important. Not all forms are due at the same time. For example, some forms may be due at the time your taxes are due, and some forms may be due before.
In addition, some forms may require you to file for an extension, some don’t’ And, some forms may require you use a separate extension form (IRS Form 7004) which is not the same as the form used to extend you taxes (4868).
What if You Never Reported the Foreign Accounts or Assets?
If you never reported, you may be subject to extensive fines and penalties. Some common penalties include:
Attorney vs. EA vs. CPA
Only with an Attorney do you get the Attorney-Client privilege — which is important, in order to maintain confidentiality.
EAs are Enrolled Agents, and practice exclusively in Tax.
CPAs may practice tax, but many of them practice in accounting, financial planning, auditing, etc.
Some practitioners are dually-licensed as an Attorney/EA or Attormey/CPA
What to look for in a Foreign Account Compliance Attorney?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years of Attorney law firm experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
Interested in Filing under IRS Relief Procedures for Certain Former Citizens?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in offshore tax and reporting amnesty. Contact our firm today for assistance with getting compliant.
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.