201711.09
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Form 8938 – Instructions for Filing an 8938, IRS Step-by-Step Guide

Form 8938 - Instructions for Filing an 8938, IRS Step-by-Step Guide (Golding & Golding)

Form 8938 – Instructions for Filing an 8938, IRS Step-by-Step Guide (Golding & Golding)

Form 8938 – Instructions for Filing an 8938, IRS Step-by-Step Guide

You just learned that the IRS considers some of your foreign assets to be “specified foreign financial assets” and you may be required to file a form 8938. What now?

Form 8938 (FATCA)

The form can seem somewhat intimidating. Just looking at it, it seems like the IRS put as much as they possible could on the updated form. The form is relatively new, and only came into existence back in 2011 after the development of FATCA.

Even though the form may seem very intense, the reality is that it is not that bad…depending on the facts and circumstances of your situation.

For example, if you only have one unreported account and you decided to go on this trek alone, it shouldn’t be that bad (of course, unless the IRS contacts you later).

Alternatively, if you have 27 assets in seven different countries generating all different types of passive income, the form is going to be much more time intensive and laborious.

To that end, here is a basic 10 step process to preparing the form. This is by no means a comprehensive summary and is not intended as a guide for you or other tax professionals to complete the form.

**If you have specific questions, you may consider visiting our other page – Form 8938 FAQ.

The reality is, some people are adamant about doing things themselves (we understand). The IRS Form 8938 can be sleep inducing, and therefore we have tried to provide you a shorter summary, to at least get the ball rolling.

First Determine if You Have to File

Not everybody with specified foreign financial assets will have to file the form. There are four different threshold requirements:

– Single or married filing separately in the United States: Aggregate total of all specified foreign assets of $50,000 on the last day of the year. Or, if you have less than $50,000 on the last day of the year but more than $75,000 on any other day of the year, you still have to file.

– Single or married filing separately Foreign Resident: Aggregate total of all specified foreign assets of $200,000 on the last day of the year. Or, if you have less than $200,000 on the last day of the year but more than $300,000 on any other day of the year, you still have to file.

– Married filing jointly in the United States: Aggregate total of all specified foreign assets of $100,000 on the last day of the year. Or, if you have less than $100,000 on the last day of the year but more than $150,000 on any other day of the year, you still have to file.

– Married filing jointly Foreign Resident: Aggregate total of all specified foreign assets of $400,000 on the last day of the year. Or, if you have less than $100,000 on the last day of the year but more than $600,000 on any other day of the year, you still have to file.

Make a List of your Foreign Assets

We recommend going through your foreign assets for the year and determine which assets you owned during the year. Assets is a very broad category and may include the following:

  • Foreign Accounts
  • Foreign Investments
  • Foreign Entity Ownership
  • Foreign Pension
  • Foreign Life Insurance

That is not a comprehensive list, but just a list of the five most common types of assets.

Determine the Value of the Foreign Assets

In order to determine whether you even have to file the form, you will need to determine the value of the assets. Therefore, it is important to use the current year exchange rate and then calculate the value of each asset.

A few key tips:

  • While there is no specific exchange rate you have to use, it has to be reasonable.
  • Both the IRS and Department of Treasury publish their own individual rates; you should keep it consistent for each asset.

Exclude Assets That Are Not Included in the Analysis

Not all assets are subject to reporting. This is a very complex area that goes beyond this introduction, but two important exclusions are the following:

Foreign Real Estate: it only needs to be included if it is part of assets owned by a foreign entity. For example, if you own real estate that you rent, that is not included, but if you own 10% of a foreign entity that owns real estate, the proportionate value of the entity assigned to you would include the value of that real estate.

Financial Account Held at a Foreign Branch of a U.S. Financial Institution: This is a bit tricky. If the foreign institution is considered a wholly-owned subsidiary and not a branch, you may find yourself in some trouble – it is typically better to just report in this type of situation, but you should speak with an experienced offshore disclosure lawyer first.

Determine the Income Generated from the Assets

Unlike the FBAR in which a person only has to report the value of their accounts, the form 8938 is different. Not only is it filed directly with your tax return, but you have to identify “a summary of tax items attributable to specified foreign financial assets.”

In other words, the IRS wants to know the type of income and the source that generated the income.

Therefore, it is important to determine the total amount of income generated from the foreign assets.

We recommend creating different columns or categories such as interest, dividends, royalties, and gains, and then determining how much was earned under each category of income.

Determine Whether your Assets are Deposit or Custodial

This is nowhere near as easy as it should be. The IRS does not make it very clear, especially for individuals who do not have a background in tax.

With that said, typically an account is going to be a deposit account unless it is being held for the benefit of another person. Depending on your specific scenario, sometimes foreign life insurance policies and retirement/pension funds may be considered custodial.

This should not be a sticking point. The idea is that the IRS wants you to disclose and they want to know the different types of assets that you have. Just because you mis-categorized an asset due to the ambiguous instructions provided by the IRS would not lead you to a penalty situation. Just give it your best shot.

Be Sure to Identify Question 3 of Part 5

This is where individuals may get into trouble. Question three of part five requests specific information regarding the account. Namely, whether the account was opened or closed this year, whether the account was jointly owned, and whether any tax items were reported from the asset.

This is important information that the IRS wants from you. It is so the IRS can determine how much income you are generating from the different accounts and whether it is an income-generating account or not.

Some returns may be rejected if this portion is not completed (but not always). The last thing you want is for the form to be rejected, because then you are asking the IRS to essentially take a second look at your specified foreign financial assets. Understanding, that for many individuals the risk of audit is relatively low and therefore, even a few mistakes should not be a big deal.

Late Filing 8938 is a Different Story

If you have not filed a form 8938 in prior years, but you had specified foreign financial assets that should have been reported, you should be careful to just start reporting.

As you can see from question three part five, the IRS will know whether the account was opened in the current year or not, and whether there are tax items that should have been reported or not.

If you file the 8938 in the current year for the first time but had a reporting requirement in prior years in which your assets are generating income, it may beg the question as to why it was not reported previously.

Avoid Quiet Disclosure

A Quiet Disclosure is when you report the prior year offshore assets without following the proper means. Yes, some individuals will make it through no problem, but other individuals will be audited and if the IRS finds the person committed a quiet disclosure, they could be in some serious trouble.

It may amount to tax fraud and the IRS may pursue the criminal investigation. Again, realize that risk of audit is usually low and most people are not audited based on these foreign issues. With that said, there are some people who are in a higher tax bracket and owns businesses/itemizes deductions and the IRS tends to audit people for these various business deductions, charitable contributions, etc. The audit then expands and the auditor starts asking questions about these foreign accounts if they are filed improperly.

We Specialize in IRS Voluntary Disclosure

We have successfully handled several hundred IRS Voluntary Disclosure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

No Case is Too Big; No Case is Too Small.

We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.

We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):

Who Decides to Submit to IRS Voluntary Disclosure?

All different types of people submit to IRS Voluntary Disclosure cases. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.

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

…We even represent IRS Staff with getting into compliance.

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

Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.

In addition to earning the Certified Tax Law Certification, Sean also holds 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.) 

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

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

Our International Tax Lawyers represent hundreds of taxpayers annually in IRS Voluntary Disclosure cases submissions in over 60 countries.

You Have Methods for Getting IRS Compliant

In reality, the IRS doesn’t issue penalties against every individual with undisclosed or unreported foreign money. In addition, the IRS offers various amnesty program to facilitate compliance.

In addition, depending on your facts and circumstances you may qualify for various alternatives to amnesty, which may result in a complete penalty waiver.

IRS Offshore Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets (in addition to Form 8938):

A Penalty for failing to file FBARs

United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. 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 3520

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. 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

Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). 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

Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. 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

Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. 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

Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. 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

Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. 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.

Summary of IRS Offshore Voluntary Disclosure

IRS Voluntary Disclosure of Foreign or Offshore Accounts is a legal method for getting into IRS Tax and Reporting compliance before the IRS finds you first.  At Golding & Golding, we limit our entire tax law practice to IRS Offshore Voluntary Disclosure. 

Why IRS Voluntary Disclosure?

With the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act) and FATCA penalties, coupled by the renewed interest in the IRS issuing FBAR (Report of Foreign Bank and Financial Account Form aka FinCEN 114) penalties — which are both very steep – it is typically a better strategy to be proactive and get into compliance, than to play “defense.”

FBAR penalties alone can reach ~$12,500 per account, per year (adjusted inflation from $10,000). While this is the maximum penalty, the “recommended penalty” is still $12,500 per year (usually 3-6 years). 

4 Types of IRS Offshore Voluntary Disclosure Programs

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

  • Offshore Voluntary Disclosure Program (OVDP)
  • Streamlined Domestic Offshore Procedures (SDOP)
  • Streamlined Foreign Offshore Procedures (SFOP)
  • Reasonable Cause (RC)

IRS Voluntary Disclosure of Offshore Accounts

Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.

When Do I Need to Use Voluntary Disclosure?

Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.

Common Un-filed IRS International Tax Forms

Common un-filed international tax forms, include:

If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to IRS Offshore Voluntary Disclosure.

Golding & Golding – Offshore Disclosure

At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.

In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”

It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.

The Devil is in the Details…

If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.

It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.

Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.

What if You Never Report the Money?

If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported —  then you are in a bit of a predicament, which you will need to resolve before it is too late.

As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.

Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).

Getting into Compliance

There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.

5 IRS Methods for Offshore Compliance

  • OVDP
  • Streamlined Domestic Offshore Procedures
  • Streamlined Foreign Offshore Procedures
  • Reasonable Cause
  • Quiet Disclosure (Illegal)

We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.

After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.

If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.

Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.

1. OVDP 

OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.

The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.

The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.

Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.

An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.

What is Included in the Full OVDP Submission?

The full OVDP application includes:

  • Eight (8) years of Amended Tax Return filings;
  • Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
  • Penalty Computation Worksheet; and
  • Various OVDP specific documents in support of the application.

Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.

Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).

OVDP Penalties

The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.

Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank) on the highest year’s “annual aggregate total of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).

For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.

Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!

                         

2. Streamlined Domestic Offshore Disclosure

The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.

What am I supposed to Report?

There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.

In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.

Reporting Specified Foreign Assets – FATCA Form 8938

Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.

The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.

The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.

Other Forms – Foreign Business

While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:

  • If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
  • If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
  • If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
  • And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.

Reporting Foreign Income

If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.

It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.

In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.

                           

3. Streamlined Foreign Offshore Disclosure

What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?

If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.

Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)

*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.

                      

4. Reasonable Cause

Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.

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