Foreign Asset Reporting: Which Offshore Forms do I File

Foreign Asset Reporting: Which Offshore Forms do I File?

Foreign Asset Reporting

Foreign Asset Reporting: The U.S. government strictly enforces foreign asset reporting to the IRS. The IRS requires U.S. owners of foreign assets to report offshore accounts, assets, investments, and income to the U.S. government each year on various different forms. Over the past few years, the IRS has been aggressively enforcing Foreign Accounts & Asset Compliance.

The Internal Revenue Service have developed various international information reporting forms, such as Form 8938 (FATCA) and FBAR (FinCEN Form 114).

Each of the different offshore reporting forms have different threshold and filing requirements. And, if a person does not timely file the requisite form, they may become subject to IRS offshore fines and penalties.

To reduce or avoid penalties, the IRS has developed various FBAR amnesty and other tax programs collectively referred to as Offshore Voluntary Disclosure.

How to Report Foreign Assets to the IRS?

Foreign Asset Reporting to the IRS rules in the U.S. are complex, and an important aspect of IRS offshore compliance. The IRS has many requirements for U.S. persons with foreign assets. The threshold requirements for reporting foreign assets will vary based on different factors, including:

  • If the filer is a U.S. person
  • If the filer is a U.S. resident
  • The type of asset being reported

Which Foreign Assets do I Report to the IRS?

There are many different foreign assets that a person may have to report, include:

  • Stock Ownership
  • Bank Accounts
  • Financial Accounts
  • Stock Accounts
  • Mutual Funds and ETF
  • Life Insurance
  • Pension and Retirement

Common penalties the IRS issue, include:

  • FBAR Penalties
  • Form 3520 Penalties
  • Form 5471 Penalties
  • Form 8938 Penalties (FATCA)
  • Special Agent Investigation

Foreign Reporting Rules FAQ

Here is our top ten list:

FinCEN Form 114 aka FBAR – Foreign Accounts

If you are a U.S. Person, the threshold question is whether you have an annual aggregate total of foreign/offshore bank accounts, financial accounts, retirement accounts, etc. that when combined, exceed $10,000. If so, you are required to file the FBAR Form and report all of the accounts.

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.

IRS Form 8938 (FATCA)

FATCA is the Foreign Account Tax Compliance Act. For individuals, it requires reporting of financial accounts and certain specified foreign assets (ownership in businesses, life insurance, etc.). There are different threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.

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.

IRS Form 3520

If you receive a gift or inheritance from a foreign person that exceeds $100,000 either in a single transaction, or a series of transactions over a year, you are required to report the gift on this form. You have the file this form, even if you are not required to file a tax return (although it is normally filed at the same time as your tax return).

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.

IRS Form 5471 or Form 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

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 8621 

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 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.

The Penalties for not filing an 8621 run concurrent with the 8938 penalties (see above).

Form 3520-A Foreign Trust

A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore. While there are many people who may operate illegally in this fashion, there are various legitimate reasons why you would be a trustee or beneficiary of a Foreign Trust (Your cool grandma really loves you and placed $5 million in trust for you overseas). Form 3520-A is a relatively complex form, which must be filed annually by anybody that owns a foreign trust.

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.

Foreign Real Estate Income

Even if you are earning rental income from property that is located outside of the United States, you still must report the income on your U.S. taxes (even it is exempt from tax in the foreign country). Remember, United States taxes individuals on their worldwide income. Therefore, the income you are earning from your rental property(s) must also be included on your US tax return.

A few nice benefits of reporting the income is that the United States allows depreciation of the structure – which many foreign countries do not allow. Moreover, you can take the same types of deductions and expenses that you otherwise take the property was located in the United States.

Worldwide Income Requirement

The United States is one of only a handful of countries on the planet that 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 US tax return.

It also does not matter if the income you earn is tax exempt in a foreign country, or whether the income you earn in a foreign country was already taxed (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.

What if I am Out of Compliance?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and foreign asset reporting.

Contact our firm today for assistance with getting compliant.