PFIC Penalties – Form 8621 Excess Distributions | FBAR | FATCA
A Foreign Holding Company may seem like a good way to aggregate multiple foreign assets and investments into a single holding company — but to the IRS it can spell trouble.
It is a very common scenario: a person has multiple investments in foreign companies, stocks, bonds, rental property, etc. and it can get very overwhelming to have multiple LLCs and foreign companies to hold the assets – especially across multiple borders.
As a result, the person moves all of the assets into one company and that company is the owner of all of the foreign investment; in other words, it “holds” the investments.
Taxes and Income
In many countries, a holding company is exempt from tax. These countries are generally considered “offshore tax havens” where individuals will form a holding company as a nonresident, for the sole purpose of holding investments. Technically, the purpose of the holding company is to oversee and manage the investment portfolio.
Since the business is not “operational” and is merely just “holding” the foreign assets, some countries have exemptions and exclusions in place to avoid tax liability — which is used to entice foreigners to invest in that country. As you can imagine, the IRS highly frowns upon this practice.
That is because from the IRS’ perspective, it does not really matter if you have five foreign investments lumped together into a single foreign holding company. In actuality, if you have five foreign investments and they have their own account numbers (read: Foreign Mutual Funds or Securities Investments) and/or are earning income, then you have to report the investments and pay tax on that income – despite what your foreign investment planner may have told you (unless certain elections were made).
*There may be some exemptions and exclusion depending on the particular holding company, the country of origin of the holding company, the types of investments, and whether there is a tax treaty without specific country. Nevertheless, the default position should be you have to pay US tax unless an exclusion or exception applies.
PFIC – Passive Foreign Investment Company
A PFIC is a Passive Foreign Investment Company. We have written numerous articles on this very complex area of law but as a very brief summary, depending on the value of the holding company that is based on passive investments and/or the amount of income generated from passive investments, the United States may consider your holding company a PFIC. It also includes Foreign Mutual Funds.
If the company is considered a PFIC, then there are some very serious reporting requirements necessary an annual basis to ensure the company is in compliance with US tax law. The reason the IRS frowns upon these types of companies is because often times the companies are used to hide, or shift income which would otherwise be taxed regularly under US tax law.
If you believe your company may qualify as a PFIC, it is very important to speak with experienced offshore disclosure attorney to evaluate the facts and circumstances of your situation. For more information on PFIC, please click here.
An FBAR aka (FinCEN 114) is a Report of Foreign Bank and Financial Account form. It is required to be filed when a person has an annual aggregate total of foreign accounts (bank accounts, investment accounts, retirement accounts etc.) that in total (not per account) exceeds $10,000 at any time during the year.
Depending on the total amount of money you have in foreign accounts, you may also have the file an IRS “FATCA” Form 8938 (Statement of Specified Foreign Assets). Unlike the FBAR which is reported electronically and directly to the Department of Treasury, the 8938 is filed directly with your U.S. tax return.
The threshold requirements for having to file and 8938 or higher than an FBAR, and will be determined by whether you file single or married filing jointly and /or whether your residence is within the United States or a foreign country.
Reporting Foreign Income and Accounts – The Basics
Offshore disclosure is a complex area of law. To that end, many clients of ours have many of the same issues, questions, or concerns regarding their failure to report and/or be in compliance.
The following is a summary:
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
Please do not worry. We can assist you as we have assisted hundreds of clients in over 40 countries disclose upwards of $40 million in a single disclosure.
We are available seven days a week and provide flat-fee and full-service representation to our clients around the world.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
Call now; let us help you.
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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)