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.
We will summarize the basics of Foreign Accounts Compliance.
IRS Increases Foreign Accounts Compliance & Enforcement
Overseas Reporting Compliance involves the reporting and disclosure of foreign bank and financial accounts located abroad.
In addition, hundreds of thousands of overseas foreign institutions are conducting their own compliance in accordance with FATCA and CRS.
Oftentimes, one of the most difficult aspects of getting compliant with the IRS and international tax, is simply trying to understand whether or not you are even required to file certain international reporting forms.
Common questions, include:
- Do I meet the threshold for filing FATCA?
- Do I meet the threshold for filing an FBAR?
- What if I never filed the form before?
- Can I file the forms late?
- Will the IRS penalize me?
- What are my options for Foreign Account Amnesty?
10-Step Offshore & Foreign Accounts Compliance & Disclosure Guide
Step 1 – Do You Have a Foreign Account?
Accounts include a laundry list of different items, including investment accounts, foreign life insurance, foreign retirement funds, and foreign provident accounts.
You should make a list of ALL your accounts.
Step 2 – Do you Own the Foreign Account or have Signature Authority?
Depending on whether you own the foreign accounts, or just have signature authority over the account(s) will help determine where and how to report the accounts — and whether it also needs to be reported on FBAR, form 8938 (interest in the account vs. signature authority) and other forms.
Step 3 – What is the Value of the Foreign Accounts?
You should use whichever exchange rate you prefer for the actual year in which you’re performing the analysis.
So if you’re analyzing for 2014 — you would use 2014 exchange rates, not the current year exchange rates.
Step 4 – Categorize the Foreign Accounts you have
You should separate the accounts by type, value, and whether you have ownership or signature authority over the account.
Step 5 – What Currency are the Foreign Accounts in?
In many countries, foreign financial institutions maintain multiple “currency sub-accounts” within the accounts, and the accounts may be in different currencies (common in Hong Kong and Taiwan)
For example, since the exchange rate for the HKD dollar and CNY are similar, but the exchange rate for the Taiwanese dollar (TWD) is much different, it is important to calculate the exchange amount properly to avoid over reporting or underreporting.
As you begin aggregating your account values, it is important to know which forms you may have to file.
A. Do You File the FBAR?
If you have foreign accounts that you have either ownership or signature authority over, and the annual aggregate total in any given years, exceeds $10,000 in US dollars using that specific year’s exchange rate – you may have an FBAR Reporting Requirement.
B. Do You File FATCA Form 8938?
If you have foreign assets/accounts that exceed any of the Form 8938 thresholds, you may have a form 8938 filing requirement as well.
There are four main thresholds for individuals is as follows:
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
C. PFIC (8621)
If you have foreign investment accounts, addition to the value, you also have to determine whether the investment is considered a PFIC.
This will help to determine what your tax liability will be, and whether you have to report the accounts on a form 8621 or not, and whether or not you have to perform an excess distribution calculation or not
D. Schedule B
Schedule B is not based on any value of the accounts. Question 7 simply asks whether or not you own foreign accounts, or if you have signature authority over foreign accounts.
Chances are that if you made it this far into our article, you probably have at least one foreign account.
Step 6 – Aggregate Your Account Values, By Type
Calculate the total amount of each type of account and whether you own it, or have signature authority over it to determine the total value.
Step 7 – Determine Which Forms You Have to File
Refer to the list of forms above to determine which forms you have to file (note: you may have other forms to file as well)
Step 8 – Did You Have to Report in Prior Years? – Very Important
Determine whether you have met the requirements in prior years as well.
*Generally, the reporting period is 3-6 years.
Step 9 – Check if the Current Year is the First Year You Had to File
If this is the first year you have to file, you are in luck.
Presuming you are timely, as long as you give it your best effort and perform a diligent and reasonable completion of the forms, usually that will be sufficient.
Step 10 – You Missed Prior Year Reporting
If you come to the realization that you did not report for prior years, then you should STOP.
Before submitting for the current year you are required to go back and fix he prior years using one of the approved IRS offshore voluntary disclosure/Tax Amnesty Programs.
While the IRS is done away with OVDP, other programs are still available such as
- Traditional IRM Voluntary Disclosure
- Streamlined Disclosure
- Reasonable Cause
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.