How to Report Foreign Investments, Prior Year Non-Disclosure

Foreign Accounts Compliance

Foreign Accounts Compliance 

Foreign Accounts Compliance: Offshore bank and financial account enforcement by the IRS is on the rise. Account disclosure to the IRS requires U.S. account holders of offshore accounts, assets, investments, & income to report the account information each year on a myriad of different International Information Returns. To ensure compliance, the Internal Revenue Service has developed an aggressive enforcement strategy. The government has developed several international reporting forms to ensure foreign account compliance and increased the issuance (and severity) of fines and penalties.

Reporting FBAR to Disclose Foreign Accounts

Reporting foreign bank and financial accounts has become more complicated over the past 5 to 10 years. With the globalization of the US economy, there are more permanent residents, visa holders, and dual citizens than ever before. As a result, there are many more people who have ownership or signature authority over foreign bank accounts, investment accounts, mutual funds and other pooled funds, foreign pension plans, and certain foreign life insurance policies. Let’s take a look at some of the reporting requirements by reviewing five common examples for taxpayers who have to disclose foreign accounts and assets to the IRS on the annual FinCEN Form 114.

Foreign Bank Accounts

Bob is a US person who has foreign bank accounts in several foreign countries, with the total value of the foreign bank accounts at around $300,000. Several of the accounts have less than $10,000 and are dormant and/or inactive. In this type of situation, since the total value of foreign accounts exceeds $10,000 for the year, all the accounts are reportable on the FBAR — even if they are below $10,000 and even if they are dormant.

Foreign Investment Accounts

Linda is a permanent resident who previously lived in a foreign country and still maintains many of her overseas accounts. The accounts are not bank accounts but rather investment accounts similar to a Vanguard or E*TRADE account in the United States. The assets are not taxable in the foreign country, and the accounts are comprised primarily of stock and mutual funds. In this type of situation, Linda must report the foreign investment accounts on her annual FBAR. Since the stock and mutual funds are in accounts, she does not typically have to parse out each stock/fund but instead, she can gross up the value of the accounts for FBAR purposes. She may have a separate requirement for reporting the individual foreign funds as well.

Foreign Stock Certificates

Louise has ownership of various foreign stock certificates. The stock certificates are not located in foreign accounts. Instead, she inherited them several years ago and in total, she has ownership of nine different stocks worth $2 million. Louise does not have to report the foreign stock certificates on the FBAR, because she owns the stock certificates individually and they are not located in a foreign account. Louise would still have to report the certificates for FATCA on Form 8938.

Foreign Pension Plans

Tina is a US citizen who worked in various countries in her lifetime. She has retirement plans in the United Kingdom (SIPP), Singapore (CPF), and Australia (Superannuation). Since the foreign pension plans are considered accounts, they are included in the annual FBAR. This is distinct from the rule that if a person has an IRA or 401(k) in the United States that holds foreign accounts in it, those foreign accounts are generally not parsed out and reported on the FBAR. But, foreign pension plans are generally included on the annual FBAR. The US Tax treatment of these accounts will vary.

Foreign Mutual Funds

Gene is an astute investor. When the market was down, he acquired various foreign ETFs and foreign mutual funds in different countries and those funds have increased in value significantly. Gene holds the funds in a single investment account. For FBAR purposes, Gene will report the account with the total different funds. But, since the total value of the funds exceeds $25,000 (Gene is still single), he will most likely have to parse out the different funds on individual form 8621s when filing his tax returns. Remember, the FBAR is a separate form from your tax return. And, since some of these funds issued large dividends for the first time this year (and he was not properly advised to make an MTM or QEF election in prior years), he may have a very complicated tax return in the coming year.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.