IRS International Tax Updates – OVDP, Passport Revocation & Enforcement
- 1 What will Happen to OVDP?
- 2 Will the IRS Streamlined Programs be Canceled?
- 3 One-Time U.S. Repatriate Tax on Money Abroad?
- 4 What Will Happen to FATCA?
- 5 FATCA Need Revisions
- 6 Will the IRS Revoke/Cancel/Deny a Passport?
- 7 What are the New International Practice Units (IPU)?
- 8 How to Get Into Compliance with Voluntary Disclosure
- 9 When Do I Need to Use Voluntary Disclosure?
- 10 Golding & Golding – Offshore Disclosure
- 11 The Devil is in the Details…
- 12 What if You Never Report the Money?
- 13 Getting into Compliance
- 14 1. OVDP
- 15 2. Streamlined Domestic Offshore Disclosure
- 16 3. Streamlined Foreign Offshore Disclosure
What is the current status of the IRS OVDP Program, and International Tax Law in general?
Ever since the new president was elected, there has been a great deal of uncertainty and anticipation as to whether there will be any changes to the US tax code, and if so how it will impact international tax law.
Some the main issues revolve around issues involving OVDP (Offshore Voluntary Disclosure Program), FATCA (Foreign Account Tax Compliance Act), IRS Passport Revocation, a possible one-time Repatriation Tax, and similar issues.
What will Happen to OVDP?
OVDP is the traditional Offshore Voluntary Disclosure Program. It is a program designed to bring individuals, businesses and estates who have unreported Offshore/Foreign funds back into compliance in the United States.
For individuals and estates, it is generally reserved for those who are willful. For businesses, since a business has limited options to get into compliance, it will generally submit to traditional OVDP (whether or not a business was willful or non-willful) — and, if the penalties are unwarranted, they business may opt-out.
There is a lot of concern as to whether the current president is going to try to further cut funding to the IRS, which may result in a cancellation of OVDP. In a recent conversation that the commissioner of the IRS had with Tax Analysts, the commissioner provided the following response as to whether OVDP was in jeopardy:
“We’re not contemplating it. In fact, I just had a conversation earlier today about how to expand and modify it and improve its operation. Part of the reason people think about why don’t we wind down is because we’ve done a lot of work looking east, particularly in Switzerland and other places. People say, ‘Well, you must be running out of possibilities.’ If you just turn around and look west, we’ve got Hong Kong, Singapore, all of Asia where a lot of people have engaged in the same kind of activities they engaged in in Europe.
So we have a lot of targets of opportunity out there, and one of the questions is, how can we encourage people to become compliant? And as we start to turn our attention to gaining data and access to data in other countries and simply in Europe, I think we’re going to find a whole lot of other taxpayers, and some are going to be in the same position. So I think we’re a long ways away from moving away from the voluntary disclosure program.
One of the reasons people have talked about winding it down is trying to encourage people you’ve got to get in. At some point, it’s going to end and then you’re going to be stuck with the normal process and you don’t want people saying, ‘I’ll just wait as long as I can.’ And so the real incentive, though, is if we find out about you after we know you exist with the banks, then the penalties and the implications go up significantly. I think that’s more of an incentive for people, and so maybe the word would go out. There are other banks in the world and other areas in the world than just Europe, and people who are maybe hiding money in other places ought to take advantage of that disclosure program, because we’re coming.”
The reason why the commissioner’s responses are so important, is because, technically the IRS can do away with OVDP without providing any notice to either Tax Professionals (Attorney, Enrolled Agent or CPA) or Taxpayers. In other words, the IRS is not required to provide any forewarning (such as a 30-day notice or otherwise) to individuals, businesses, estates, or tax professionals letting them know that the program is going to be discontinued.
Therefore, if you are considering entering traditional OVDP, you may want to act sooner as opposed to later.
Will the IRS Streamlined Programs be Canceled?
For many individuals, this is a major concern – especially for individuals who meet the Foreign Resident Test of the Streamlined Foreign Offshore Procedures. That is because depending on whether a person is a U.S. Resident and/or Non-Resident that meets the Foreign Resident Test – the person who is out of tax compliance can get back into tax compliance while avoiding most penalties as provided under the Internal Revenue Code.
If a person qualifies under the Streamlined Domestic Offshore Procedures, their penalties are reduced to 5%. Better yet, if a person qualifies for the Streamlined Foreign Offshore Procedures, the penalties are waived. While the IRS has not indicated whether they are going to discontinue the program or, it should be noted that when the program was introduced, it was done so as a temporary “Band-aid.”
The Streamlined Procedures were introduced (the current version of the program) and around July 2014 which is also the same year in which FATCA began enforcement (the law was written in 2010 but did not take effect until 2014).
When it comes to the traditional OVDP, it should be noted that there have been steady penalty increases since the inception of the program back in 2009 (when it was called OVDI). At that time, there were three penalty structures, with the highest penalty being 20%. These days (2017), the penalty has been increased to 27.5% unless any of the money is being held in a bad bank, in which the penalty reaches 50% for all the money, including money not deposited in a bad-bank.
Thus, chances are that at some point the IRS streamlined program penalties will increase (presuming that the program is not discontinued first)
One-Time U.S. Repatriate Tax on Money Abroad?
Possibly. At this time, it is unclear as to whether the president is going to pursue this position. During his candidacy, the president made representations that he would implement a one-time repatriation tax in order to facilitate the transfer of foreign money back into the United States.
Many corporations, companies and other businesses that operate overseas keep their money abroad. It is not so much because they do not want to bring the money back to the United States, rather they do not want to pay a hefty income tax for distributing the money, and were hoping for a better tax position in the future.
In years past (before subpart F and other related laws), there were many more legal loopholes that would allow a foreign business that operated overseas to funnel money back to the United States (whether through loans or otherwise) to the owners of the companies and they were able to altogether avoid tax.
Now, with offshore tax evasion being a major enforcement priority, it is not so easy anymore. In addition, with the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act), and tens of thousands of Foreign Financial Institutions agreeing to report account holder information to the United States, it is getting harder to fly below the radar.
As was seen with the Panama Papers, it just takes a few whistleblowers to ignite an offshore legal firestorm.
Another important aspect for individuals to consider is that even though the current administration seems pro-business, it does not mean that the current administration promotes individuals stashing money overseas without paying proper US tax. In other words, while the current president may create a one time repatriation tax for businesses, it does not mean the administration will take it easy on individuals who have stored money overseas and not properly reported or paid U.S. tax on the earning (see below).
What Will Happen to FATCA?
During Obama’s administration, there was the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act). The law has drawn significant controversy from individuals who believe that is being improperly enforced. Specifically, even though the goal of FATCA is to reduce offshore tax fraud and tax evasion, there are numerous “innocent” individuals getting caught in the mix, and being forced to consider relinquishing their green card or renouncing citizenship to avoid the harsh realities of being a US person and residing abroad.
Nevertheless, at this time (May 2017), FATCA is still on the books, and still being enforced. The United States has entered into agreements with more than 100 different countries and tens of thousands of foreign financial institutions have already agreed to report account payer information to the United States
FATCA Need Revisions
FATCA is a peculiar law. The goal of FATCA is noble – is to try to reduce offshore tax fraud and offshore tax evasion by requiring foreign financial institutions to report US account holder information to the United States. Conversely, the United States is supposed to reciprocate and provide account holder information of US that accounts and other investment accounts to foreign countries — but whether or not the United States it’s holding up its end of the bargain is yet to be seen.
There has been a recent push to try to get FATCA removed. The idea behind the push is that many innocent individuals are being unfairly brought into the FATCA crosshairs, due to no fault of their own. This is especially true for accidental Americans or other ex-pats who have made a home and life for themselves abroad, but are still considered U.S. Citizens or Legal Permanent Residents and therefore have a worldwide tax reporting requirement (aka Citizen Based Taxation or “CBT”)
For these individuals, it is highly unfair that they are having problems opening or maintaining bank accounts or investment accounts in the country they chosen as home. Nevertheless,whether the current president believes that the law is so bad that it should be erased from the books is yet to be see.
At this time, the current administration has not made any proactive statement that he had any intention whatsoever of repealing FATCA. Even though there is a current lawsuit pending and various foreign based organizations seeking for a FATCA repeal, there is no knowing this time whether it is going to be repealed.
This is important, because if you do have money offshore and you have not reported to the US government (FBAR, 8938, etc.) there is a probability that your foreign financial institution will report your information to the United States. If they do, and you are audited or examined by the IRS they could lead you down a dark path.
While there are some non-tax professionals urging individuals to not get into compliance – you should at least be aware that if you are a US person, you are required to be in compliance and if you do not into compliance then the IRS can enforce incredibly high fines and penalties against you.
While you may reside in a different country that practices resident based taxation instead of citizen-based taxation, if you are still a US citizen or Legal Permanent Resident, you are required to be tax compliance under US law.
… This brings us to the next issue: Passport Denial/Revocation.
Will the IRS Revoke/Cancel/Deny a Passport?
Yes. In fact, the IRS has made it known that they’re going to be enforcing this law – so if you do have a US passport and you do have a significant tax liability you should be aware that the US has the right to revoke or cancel your passport.
In fact, the IRS updated their page as recent as April 28, 2017 to provide the following:
If you have seriously delinquent tax debt, IRC § 7345 authorizes the IRS to certify that debt to the State Department for action. The State Department generally will not issue a passport to you after receiving certification from the IRS.
- Certification Of Individuals With Seriously Delinquent Tax Debt
- Annual Adjustment For Inflation
- Taxpayer Notification – Notice CP 508C
- Reversal Of Certification – Notice CP 508R
- Judicial Review Of Certification
- Payment Of Taxes
- Passport Status
Upon receiving certification, the State Department shall deny your passport application and/or may revoke your current passport. If your passport application is denied or your passport revoked and you are overseas, the State Department may issue you a limited validity passport good only for direct return to the United States.
Certification Of Individuals With Seriously Delinquent Tax Debt
Seriously delinquent tax debt is an individual’s unpaid, legally enforceable federal tax debt totaling more than $50,000* (including interest and penalties) for which a:
- Notice of federal tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted or
- Levy has been issued
Some tax debt is not included in determining seriously delinquent tax debt even if it meets the above criteria. It includes tax debt:
- Being paid in a timely manner under an installment agreement entered into with the IRS
- Being paid in a timely manner under an offer in compromise accepted by the IRS or a settlement agreement entered into with the Justice Department
- For which a collection due process hearing is timely requested in connection with a levy to collect the debt
- For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made
Before denying a passport, the State Department will hold your application for 90 days to allow you to:
- Resolve any erroneous certification issues
- Make full payment of the tax debt
- Enter into a satisfactory payment alternative with the IRS
Annual Adjustment For Inflation
*The $50,000 threshold is indexed yearly for inflation
Under new Code Section 7345(f), in the case of a calendar year beginning after 2016, the dollar amount in new Code Section 7345 shall be increased by an amount equal to (1) such dollar amount, multiplied by (2) the cost-of-living adjustment determined under Code Section 1(f)(3) for the calendar year, determined by substituting “calendar year 2015” for “calendar year 1992” in Code Section 1(f)(3)(B). If any amount as adjusted under the preceding sentence is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.
Taxpayer Notification – Notice CP 508C
The IRS is required to notify you in writing at the time the IRS certifies seriously delinquent tax debt to the State Department. The IRS is also required to notify you in writing at the time it reverses certification. The IRS will send written notice by regular mail to your last known address.
Reversal Of Certification – Notice CP 508R
The IRS will reverse a certification when:
- The tax debt is fully satisfied or becomes legally unenforceable.
- The tax debt is no longer seriously delinquent.
- The certification is erroneous.
The IRS will make this reversal within 30 days and provide notification to the State Department as soon as practicable.
A previously certified debt is no longer seriously delinquent when:
- You and the IRS enter into an installment agreement allowing you to pay the debt over time.
- The IRS accepts an offer in compromise to satisfy the debt.
- The Justice Department enters into a settlement agreement to satisfy the debt.
- Collection is suspended because you request innocent spouse relief under IRC § 6015.
- You make a timely request for a collection due process hearing in connection with a levy to collect the debt.
The IRS will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a debt that is not the basis of the certification. Also, the IRS will not reverse the certification because the taxpayer pays the debt below $50,000.
Judicial Review Of Certification
The State Department is held harmless in these matters and cannot be sued for any erroneous notification or failed decertifications under IRC § 7345.
If the IRS certified your debt to the State Department, you can file suit in the U.S. Tax Court or a U.S. District Court to have the court determine whether the certification is erroneous or the IRS failed to reverse the certification when it was required to do so. If the court determines the certification is erroneous or should be reversed, it can order the IRS to notify the State Department that the certification was in error.
IRC § 7345 does not provide the court authority to release a lien or levy or award money damages in a suit to determine whether a certification is erroneous. You are not required to file an administrative claim or otherwise contact the IRS to resolve the erroneous certification issue before filing suit in the U.S. Tax Court or a U.S. District Court.
Payment Of Taxes
If you can’t pay the full amount you owe, you can make alternative payment arrangements such as an installment agreement or an offer in compromise to have your certification reversed.
If you disagree with the tax amount or the certification was made in error, you should contact the phone number listed on Notice CP 508C. If you’ve already paid the tax debt, please send proof of that payment to the address on the Notice CP 508C.
If you recently filed your tax return for the current year and expect a refund , the IRS will apply the refund to the debt and if the refund is sufficient to satisfy your seriously delinquent tax debt, the account is considered fully paid.
If your U.S. passport application is denied or your U.S. passport is revoked, the State Department will notify you in writing.
If you need your U.S. passport to keep your job, once your seriously delinquent tax debt is certified, you must fully pay the balance, or make an alternative payment arrangement to have your certification reversed.
Once you’ve resolved your tax problem with the IRS, the IRS will reverse the certification within 30 days of resolution of the issue and provide notification to the State Department as soon as practicable.
What are the New International Practice Units (IPU)?
The IRS is operating on a shoestring budget and with a reduced staff. With that said, the IRS has recovered billions of dollars to offshore tax enforcement and sees it as an opportunity to further generate revenue. As a result, the IRS developed international practice units that are designed to better assist with enforcing international tax (as well as non-international tax), related issues.
As provided by the IRS: As part of LB&I’s knowledge management efforts, Practice Units are developed through internal collaboration and serve as both job aids and training materials on tax issues. For example, Practice Units provide IRS staff with explanations of general tax concepts as well as information about a specific type of transaction. Practice Units will continue to evolve as the compliance environment changes and new insights and experiences are contributed. Please visit this site periodically for new and updated Practice Units which are shared below.
To provide feedback on a specific Practice Unit, please send an email to LBI Practice Unit Public Feedback and specify the Practice Unit’s name and Document Control Number (DCN), which are both listed on the Practice Unit’s cover page. Please do not reference a specific individual or entity in your email as comments may be subject to future release. The IRS does not commit to respond to suggestions or comments.
Practice Units are available in Adobe PDF and must be viewed with the Acrobat Reader.
NOTE: Practice Units are not official pronouncements of law or directives and cannot be used, cited or relied upon as such. Practice Units provide a general discussion of a concept, process or transaction and are a means for collaborating and sharing knowledge among IRS employees. Practice Units may not contain a comprehensive discussion of all pertinent issues, law or the IRS’s interpretation of current law. Practice Units do not limit an IRS examiner’s ability to use other approaches when examining issues. Practice Units and any non-precedential material (e.g., a private letter ruling, determination letter, or Chief Counsel advice) that may be referenced in a Practice Unit may not be used or cited as precedent. References to third party service providers and documents, like news or journal articles, are for informational purposes only and do not constitute an endorsement of any vendor, document, or the services or views offered by such third party.
How to Get Into Compliance with Voluntary Disclosure
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 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. 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.
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).
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.
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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.)