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What Types of Foreign Assets do I Include on my Tax Return?

What Types of Foreign Assets do I Include on my Tax Return? - Golding & Golding

What Types of Foreign Assets do I Include on my Tax Return? – Golding & Golding

What Types of Foreign Assets do I Include on my Tax Return?

The reporting of Specified Foreign Financial Assets) involves various IRS Forms, but specifically 8938.

The forms for Foreign Asset reporting as associated with FATCA (Foreign Account Tax Compliance Act). The failure to file this FATCA Form can lead to extensive Fines and Penalties. That is because under current U.S. Tax law, the IRS and U.S. Government have made Foreign Financial Reporting a key enforcement priority.

What Types of Foreign Assets do I Report to the IRS?

Reporting Foreign Financial Accounts, Assets, Income and investments is important (at least to the IRS, and possibly your pockets).  So much so, that Unlike the FBAR, this form is filed directly with your IRS Tax Return.

If your Tax Return is Audited by the IRS, and they discover that you have not Reported Financial Assets, it can lead to extensive fines and penalties — which if left unpaid can also lead to ancillary issues such as IRS Passport Revocations.

Understanding Financial Assets

Financial assets have a broad scope. They are not limited to just bank accounts or other foreign accounts. Rather, they include a broad range of different types of accounts, including investment accounts, stock ownership, bank accounts (although there are some limited reporting exceptions), foreign retirement, foreign pension profit funds, foreign life insurance policies, and other assets located outside of the United States.

*While the direct ownership of a foreign real estate property is not included on form 8938, if you own a foreign corporation, partnership or other entity and it holds real estate, the value of the real estate is included in your value of the share of the foreign business.

**If you own more than 10% or otherwise control a foreign business, you may also have (in lieu of) reporting requirements in accordance with Form 5471 (Foreign Corporations) or Form 8865 (Foreign Businesses).

What is a Foreign Financial Asset?

Typically, a foreign asset is an asset that is located outside of the United States. For purposes of individuals reporting under FATCA, it does not matter if you own asset before you became a US person, or whether you on the asset in the country of your citizenship or birthplace. For purposes of individuals and FATCA, if the asset is located outside of the United States, then more likely than not it is going to be considered a foreign asset.

Examples of Foreign Assets

A more detailed summary list of foreign assets to be reported on form 8938 include:

• Foreign Bank Accounts
• Foreign Savings Accounts
• Foreign Investment Accounts
• Foreign Securities Accounts
• Foreign Mutual Funds
• Foreign Trusts
• Foreign Retirement Plans
• Foreign Business and/or Corporate Accounts
• Foreign Life Insurance Policies
• Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
• Foreign Accounts held in a PFIC (Passive Foreign Investment Company)

Foreign Accounts

When it comes to foreign accounts, it can be a bit more complicated. That is because there are some exceptions, although they are very narrow in scope and can cause more problems and benefits if you misinterpret the exception. For example, in accounts in a foreign branch of the US bank may not need to be reported, but an account held in a foreign financial institution does need to be reported.

So before you decide to exclude one of your accounts because it is in a foreign bank with a US Home(aka Citibank), you must be certain that it is a branch and not a wholly-owned subsidiary or something similar that might give way to the IRS interpreting it as a foreign financial institution.

Form 8938 vs. FBAR

While form 8938 and the traditional FBAR (report of foreign bank and financial accounts) are similar, they are different as well. More specifically, the form 8938 is a relatively new form in which the taxpayer must actually file the form with the tax return. Form 8938 requests more specific information regarding specified foreign assets, as well as a summary breakdown of the different types of income that are earned from accounts or assets detailed on form 8938.

The FBAR is more limited in scope and is filed electronically (separately and distinct) from the person’s tax return. Since 2016, the due dates of the same, but the threshold requirements for filing the FBAR are much lower, but the penalties can far exceed FATCA — resulting in 100% penalty if the taxpayer was audited for multiple years and found to be willful.

But I Already Filed an FBAR?

Please keep in mind that the Form 8938 and FBAR are not the same. Thus, while some individuals may have an FBAR reporting requirement simply because they have signature authority or another relationship to a foreign account, if they have no interest in the money — they may not even need to file a form 8938.

How is Form 8938 Different From an FBAR?

First, unlike the FBAR which is submitted separately, electronically, to the Department of Treasury – Form 8938 is filed directly alongside your tax return (if you meet the threshold requirement) to the IRS.

Unlike the FBAR, form 8938 requires much more in the way of reporting. Namely, if your foreign financial accounts or assets are generating income, then unlike the FBAR, a Form 8938 requires that you disclose the income (line-by-line) on the form.  Form 8938 has evolved since its introduction back in 2011, but the reporting requirement remains the same.

Moreover, unlike the FBAR, IRS Form 8938 required you to break down the income by category/type. For example, if you earned interest income from a custodial account, you have to identify it directly on this form. If you earned dividend income from a deposit account, you would also have to identify it separately on its own line. (Noting, custodial and deposit account income is not distinguished on the form as of current)

In addition, if you received royalties from a specified foreign asset, then this would also go on a separate part the form for income generated from assets, as opposed to accounts.

But I already Reported my Foreign Income on Schedule B?

It does not matter. Just because you reported your foreign income on schedule B does not exempt you from the burdensome dual reporting of also including in on the Form 8938.  

It Looks like I have more Money than I Do?

This is a much more common situation than you may think:

Example – Andrea has $1 million in foreign accounts. During this particular tax year, Andrea moved more than $800,000 of her retirement fund into a new retirement fund. Moreover, Andrea had a few fixed deposits that matured, and therefore she closed those accounts, withdrew the money, and opened new fixed deposits.

Since all of the accounts at some point were ‘open’ during the current tax year that Andrea is filing a Form 8938, she will have to report each account. As a result, it may appear as if Andrea has more than twice the money she has, when in reality it is the same money being transferred to different accounts.

Not to worry, the IRS already thought of this. If you inspect Form 8938, you will find that each account entry has certain boxes you can mark-off depending on the facts and circumstances of your case, including:

  • Was the account opened this year?
  • Was the account closed this year?

This should help alleviate some of that stress we know you’re feeling when you have to submit paperwork to the IRS making it appear that you are more wealthy than you are.

Threshold Requirements for Filing an IRS form 8938?

Whether or not the taxpayer has to file a FATCA Form 8938 will depend on the amount of money they have overseas, country of residence and marital status.

For Taxpayers residing in the United States:

Single Taxpayers or Married Filing Separate (MFS)

If a taxpayer is single, or files married filing separate then they will have to file IRS form 8938 if they have more than $50,000 in aggregate total in Specified Foreign Assets on the last day of the year. Alternatively, if they have less than $50,000 on the last day of the year but at any time during the year they had $75,000 or more in Specified Foreign Assets, then they are also required to file IRS form 8938.

Married Filing Jointly Taxpayers (MFJ)

When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $100,000 on the last day of the year or if it anytime during the year they had $150,000 or more in overseas accounts.

If a person does not meet these threshold requirements then generally they will not have to file IRS form 8938.

*Taxpayers should be sure they understand that even if they are not required to file IRS form 8938, they may still be required to file an FBAR with the Department of the Treasury, since the threshold requirements for overseas accounts and FBARs are significantly less ($10,000). 

**Unlike the FBAR, a person only has to file an IRS form 8938 when the money is theirs; with an FBAR, a person has to file the FBAR even if the money is not theirs, but they have signatory authority over the accounts.

***The Threshold Requirements for Taxpayers residing overseas to have to file a FATCA Form 8938 are significantly higher.

Single Taxpayers or Married Filing Separate (MFS) – Foreign Residents

If a taxpayer is single, or files married filing separate then they will have to file IRS form 8938 if they have more than $200,000 in aggregate total in Specified Foreign Assets on the last day of the year. Alternatively, if they have less than $200,000 on the last day of the year but at any time during the year they had $300,000 or more in Specified Foreign Assets, then they are also required to file IRS form 8938.

Married Filing Jointly Taxpayers (MFJ) – Foreign Residents

When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $400,000 on the last day of the year or if it anytime during the year they had $600,000 or more in overseas accounts.

If a person does not meet these threshold requirements then generally they will not have to file IRS form 8938.

                                           

What if I do not Not Actually Own the Money or Asset?

Form 8938 differs from the FBAR. That is because when you file an FBAR, it is one you either have ownership of the foreign account, joint ownership of the, or signature authority over the foreign account. IRS Form 8938 is different. Technically, you only have the file the form if you have an interest in the. Therefore, whether or not you have any interest in the money is a higher threshold than simply having your name or signature authority on the account.

As provided by the IRS: “Unless an exception applies, you must file Form 8938 if you are a specified person (either a specified individual or a specified domestic entity) that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

Do I File a Form 8938 If I Receive a Foreign Gift?

Generally, the answer is no. Rather, you would file a form 3520. It is important to note that on the form 8938 it asks you whether you have to file any other forms, and one of the forms it identifies is form 3520. Therefore, while you do not need to file a form 3520 and form 8938 for the same asset or account, you do need to identify on form 8938 that you have filed a form 3520. Click Here to learn more about Form 3520 and the penalties involved.

**If you received a gift into your Foreign Account, you may need to file Form 8938

Do I File a Form 8938 If I own a Foreign Business?

This is a bit of a trickier answer. Technically, if you have interest in a foreign business and that interest is at least 10%, then you will file a form 5471 (presuming it is not a PFIC). And, if you file a form 5471 then you are not required to file a form 8938 for that same interest.

Conversely, if you have an interest in a foreign business or own foreign business stock and it does not meet the 10% threshold, then you would have to file a form 8938 presuming that you met the threshold requirements for having to file a form 8938.

In other words, while you may not have to file a form 5471 because your ownership is less than 10%, if the value is higher than the threshold required for a form 8938, you would still have to file a form 8938Click Here to learn more about Form 5471 and the penalties involved.

What are the Penalties for an Un-Filed 8938?

If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000 per year.

– Continuing failure to file: If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000, for a total of $60,000 in maximum penalties.

Who is Liable for 8938 Penalties?

Maybe.

Married Taxpayers filing a JOINT income tax return

If you are married and you and your spouse file a joint income tax return, the failure to file penalties apply as if you and your spouse were a single person. In other words, the spouses are “joint and severally” liable for the penalties.

Married Taxpayers filing a SEPARATE income tax return

 If you are married and you and your spouse file a separate income tax return, than only the person who is one the account or asset (presuming only one of the spouses would have been required to file a Form 8938) is required to pay the penalty.

Presumption of Maximum Value

If the IRS determines that you have an interest in one or more specified foreign financial assets and asks you for information about the value of any asset, but you do not provide enough information for the IRS to determine the value of the asset, you are presumed to own specified foreign financial assets with a value to be determined by the IRS. Moreover, you are subject to the failure-to-file penalties if you do not file Form 8938.

Want to Get Into IRS Compliance?

If you are out of compliance, you may consider getting back into Compliance (or into compliance for the first time) with IRS Offshore Voluntary Disclosure.

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 (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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.

A Penalty for failing to file Form 3520

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.

A Penalty for failing to file Form 3520-A

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.

A Penalty for failing to file Form 5471

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.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, 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.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, 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, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

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