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IRS Foreign Asset Reporting – Important Facts Everyone Should Know

IRS Foreign Asset Reporting - Important Facts Everyone Should Know

IRS Foreign Asset Reporting – Important Facts Everyone Should Know

IRS Foreign Asset Reporting 

Reporting Foreign Assets to the IRS is important (due to the excessive fines and penalties the IRS may issue for noncompliance).

As an International Tax Law Firm that focuses exclusively on IRS Offshore Disclosure and Reporting Foreign Assets, Accounts, Investments, and Income to the United States Government (IRS, DOT & DOJ) – we understand your fear and restlessness.

We understand that there is so much misinformation written online that is geared towards scaring individuals who already out of compliance with fears prison and hundred percent penalties, that it overwhelms you ad makes you want to bury your head in the sand.

Don’t, there is help.

While the Internal Revenue Service has made reporting foreign assets a key enforcement priority, except in certain situations where an individual is willful (which is a very tough burden for the IRS to meet), most individuals will be able to import foreign assets to the IRS late/untimely – without fear of prison or willfulness penalties.

Reporting Foreign Assets to the IRS – The Basics

Reporting Foreign Assets to the IRS is a crucial part of remaining compliance for individuals who have for assets (aka offshore investments, real estate, accounts, income, life insurance, etc.). Whether it is Form 8938, FBAR Filing (FinCEN 114) or other less known forms (see below) — reporting Foreign Bank Accounts or Specified Foreign Assets is important.

Ever since the IRS (Internal Revenue Service) has made the enforcement of offshore compliance a key priority, the IRS has been working tirelessly to discover and penalize individuals and businesses with foreign asset reporting fines and penalties.

In other words, IRS Foreign Asset Reporting is not something to take lightly, and the failure to report could lead to an IRS Criminal Investigation.

Common Types of Foreign Asset Reporting

The following are common types of IRS Reporting, which Golding & Golding has written extensively on:

  • Form 3520: Foreign Trusts and Gifts
  • Form 3520-A: U.S. Owner of a Foreign Trust
  • Form 5471: Foreign Corporation
  • Form 8865: Foreign Partnership
  • Form 8621: Passive Foreign Investment Company
  • Form 8938: Specified Foreign Assets (FATCA)
  • FBAR: Report of Foreign Bank & Financial Accounts

If you have foreign assets, but have not reported them timely and properly to the IRS or DOT (Department of Treasury), it is important to work to get into compliance before your nondisclosure is discovered and you are hit with excessive fines and penalties.

What Foreign Assets Must be Reported?

The IRS wants to know about nearly all of your foreign assets. But, as usual the Internal Revenue Service likes to keep things ambiguous and nebulous. For example, if you own a piece of real estate abroad and you do not rent the property, then technically do not need to report the property to the IRS.

Conversely, if the property is held in a foreign corporation or trust, then you would have to report the Corporation and trust on forms such as 3520, 3520-A, 5471 and 8621 — and you have to include the value of the property as part of the reporting.

Moreover, if you use undisclosed money to purchase the foreign property, and you were willful in your failure to disclose, then the value property would become part of the penalties that could be subject to depending on the facts and circumstances of your situation.

Foreign Asset Reporting is Complex

Foreign asset reporting is a complex area of tax law reserved for tax lawyers who focus their entire practice on offshore disclosure and international tax. It is not the type of error of law where you would utilize a tax law firm that only makes foreign asset reporting one part of their practice (aka tax law firms that also practice lien removal or similar tax resolution issues)

10 Key Things to Know

These are not the only 10 things you should know about Foreign Asset Reporting to the IRS, but it is a good start.

Reporting Foreign Accounts (FBAR)

There is a lot of information online regarding the FBAR (Report of Foreign Bank and Financial Account Form) due to the extremely high penalties involved with this form. We have written countless articles, which you can find in our International Tax Library, by clicking here. 

If you are a U.S. Person, it does not matter whether or not you have to file a US tax return to determine if you have to file an FBAR. 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.

It does not matter if the money is all in one account, or in 15 different accounts. It also does not matter if the majority of the money is in one account, with minimal amounts of money in the remaining accounts – rather, once you meet the threshold requirements, you have to report all the accounts.

Penalty: 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.

Golding & Golding ResourcesFBAR FAQFBAR Penalties

FATCA Form (8938)

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.

Penalty: 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.

Golding & Golding ResourcesForm 8938 FAQ; Form 8938 Penalties

Foreign Gift 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).

Penalty: 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.

Golding & Golding ResourcesForm 3520 Penalties

Foreign Corporation or Foreign Partnership (5471 or 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

Penalty: 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.

Golding & Golding ResourcesForm 5471 Penalties

Passive Foreign Investment Company (PFIC)

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.

As a result, the IRS requires annual disclosure of anyone with even a fractional interest in a PFIC (unless you meet very strict exclusionary rules)

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

Golding & Golding ResourcesForm 8621 PenaltiesPFIC Form 8621 Excess Distribution CalculationPFIC MTM Election

Foreign Trust (3520-A)

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.

Penalty: 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.

Golding & Golding ResourcesForm 3520-A Foreign Trust Penalties 

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.

Penalty: Varies, depending on the Nature and Extent of the non-disclosure.

Golding & Golding ResourcesForeign Real Estate Income FAQ

Worldwide Income

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.

Foreign Tax Credit

If you are required to file a U.S. tax return, then you are required to include your worldwide income. With that said, you may be eligible for a Foreign Tax Credit for taxes you already paid in a foreign country. For example, if you earn $100,000 in Hong Kong and paid 20% tax on those earnings ($20,000) when you report the $100,000 of income on your U.S. tax return, you may also be able to  claim a foreign tax credit for the $20,000 you already paid.

If $20,000 is less than you would have had to pay in the United States, then you will pay the difference; if $20,000 is more than you would have had to pay in the United States then you can apply the overpayment (aka Carryover) to future years but only to offset foreign tax.

Foreign Earned Income Exclusion

If you have earned income from overseas (such as employment) and do not work for the US government, you may be entitled to an exemption/exclusion of the first hundred thousand dollars worth of foreign income you earn – along with the possibility of excluding roughly $15,000 worth of housing costs. There are two methods for obtaining this exclusion:

Physical Presence Test

The first (and easiest) methods is by meeting the Physical Presence Test, which is essentially met when you live overseas for 330 days in any 365 day period.

Bona-Fide Resident Test

This test is much more difficult to meet, because unlike the Physical Presence Test which is essentially a “counting days test,” a Bona-Fide resident must show that they are true residents of the foreign country. Therefore, working as a government contractor nine months out of the year, while living in your company sponsored housing and not obtaining a local Driver’s License, Membership in Community Clubs, etc. will not be sufficient. You have to essentially immerse yourself into the local community.

What if I am Out of Compliance?

If you are out of compliance for failing to report foreign assets to the IRS, IRS Offshore Voluntary Disclosure is one of the best and safest methods for getting back into compliance (and the only area of law we handle at Golding & Golding, APLC)

IRS Offshore 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 if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.

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 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.

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. Unlikes 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.

Call Now, We Can Help.