Foreign Bank Account Reporting & the IRS

The Foreign Bank Account Reporting rules are complex: Reporting Foreign Bank Accounts to the IRS and FinCEN on your U.S. Tax Return, FBAR (Form 114) and Form 8938 is very important.  

That is because when a person is considered a US person for tax purposes, the number of reporting requirements they have to fulfill increases exponentially. And, one of the most important reporting requirements is reporting Foreign Bank Accounts and/or Foreign Financial Accounts.

Many of these reporting requirements revolve around the disclosure of offshore accounts, foreign accounts and other assets abroad.

Who Has to Report?

Essentially, any individual who is considered a U.S. person and has an annual aggregate total of more than $10,000 on any given day of foreign accounts has to report to the U.S. government and Internal Revenue Service. This typically includes U.S. Citizens, Legal Permanent Residents, and individuals who otherwise meet the Substantial Presence Test.

What many people get tripped up is the idea that if the money does not belong to them, then they do not have to report — but tat is incorrect. Likewise, another common misconception is that if the money was earned and/or the account was opened prior to the person becoming a US person that they do not have to report this information either; that is also misconception.

Seriousness of Foreign Bank Account Reporting

Ever since the Internal Revenue Service made foreign bank account reporting a key enforcement priority for the IRS, the magnitude of the penalties a person may suffer for even a simple, innocuous mistake can far exceed outweigh any error an individual might make in not reporting the foreign bank account.

Foreign Account Reporting – The Basics

The Internal Revenue Service does not parse out ownership of the accounts by date for reporting purposes. In other words, simply because a person may have opened the account prior to becoming a U.S. person and/or earned the money before becoming a US person is also immaterial.

A Snapshot of Your Account Value

One method you can use to determine if you have to report under at least the minimum threshold requirements (usually the FBAR) is to use the snapshot method. In other words, consider each day a separate day. And, if on that day you have more than $10,000 in foreign accounts or offshore accounts (aggregating all your foreign accounts, despite whether all of the money is in one account or spread over multiple accounts) then you must report all the account

It does not matter if the money is yours, or if the money is in a joint account in which you were only placed on the account for convenience. It also does not matter if you merely have signature authority over the account. In any of the aforementioned scenarios, you have to report on at least an FBAR (exceptions and exclusion apply) — and the FBAR carried some of the harshest penalties under U.S. Tax Law.

Other 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)

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.

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 Resources: FBAR 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 FAQForm 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 Resources: Form 8621 Penalties; PFIC Form 8621 Excess Distribution Calculation; PFIC 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.

PenaltyVaries, 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.

Golding & Golding: About Our International Tax Law Firm

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

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Streamlined Counsel?

How to Hire Experienced Streamlined Counsel?

How to Hire Experienced Offshore Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.