- 0.2 Income Tax & U.S. Citizens, Green Card Holders & Residents
- 0.3 Did You Recently Give Up Green Card?
- 0.4 Russia and FATCA
- 0.5 Foreign Account Reporting – Bank, Investment & Retirement
- 0.6 FBAR vs. FATCA
- 0.7 FBAR (Treasury Department Form FinCEN 114)
- 0.8 FATCA (IRS Form 8938)
- 0.9 U.S. Income Tax Treaty with Russia
- 0.10 Estate Tax Treaty
- 0.11 Foreign Insurance – U.S. Tax
- 0.12 Russian Retirement Fund
- 0.13 Foreign Trusts
- 0.14 Common Corporate Structures – De Facto
- 0.15 Foreign Real Estate – U.S. Tax and Reporting
- 0.16 Golding & Golding Can Help You!
- 0.17 Who Has to Report?
- 1 The Basics
Russia has a large number of immigrants coming to the United States, as well as a large U.S. expat community.
As a result, the U.S. government is taking more and more interest in Russia to ensure that proper reporting and disclosure compliance requirements for individuals and businesses involving Russia are being met.
To that end, Golding & Golding will provide you with a general summary of international tax law as it relates to the United States and Russia.
This summary is by no means comprehensive, but rather provides a brief introduction to some of the more important issues to keep in mind if you have foreign accounts or income from Russia — as well as U.S. Tax and/or Foreign Account Reporting Requirements.
Income Tax & U.S. Citizens, Green Card Holders & Residents
The requirement to file U.S. tax returns (unless a person is otherwise exempted or excluded) is a requirement that comes along with being a US Citizen and/or Legal Permanent Resident. Under U.S. tax law, the United States taxes U.S. taxpayers on their worldwide income.
That means that even if you are a U.S. Expat or living overseas in Russia and earn all of your money outside of the United States (Whether you are a resident of the U.S or not), you are required to file a U.S. tax return, report the income, and usually pay tax on the money. It does not matter where you live with respect to the requirement to file. (You may have certain taxes and income exempted/credited under either the Foreign Tax Credit or Foreign Earned Income Exclusion).
Did You Recently Give Up Green Card?
Unfortunately, that does not mean you are out of the clear just yet…
Just because you recently gave up your Green Card does not mean you are automatically exempt from filing U.S. Tax Returns. Long-Term Green Card Holders who meet the definition of “Covered Expatriate” may still have to file and pay U.S. Taxes. Covered Expatriate is a complex analysis that requires the assistance of an experienced International Tax Lawyer.
Russia and FATCA
FATCA is the Foreign Account Tax Compliance Act. It is a global law developed by the United States in order to crack down on international tax fraud and offshore tax evasion. More than 100 countries have agreed to enforce FATCA and many thousands of foreign financial institutions have agreed to report US account holders to the United States. For more information on FATCA, Click Here.
While Russia has not formally signed a FATCA Agreement, Russia does have an alternate law in place to facilitate offshore reporting. The main reason Russia has not formalized a “FATCA Agreement” with the U.S. is because doing so may violate Russian Law – not because Russia is refusing to cooperate. To that end, there are nearly 1500 Russian Foreign Financial Institutions are identified on the IRS website that have agreed to comply with FATCA. (The List can be found by Clicking Here)
As a result of the signing of this agreement, the window of opportunity to get into compliance before it is too late is closing fast. If a Foreign Financial Institution reports your information to the United States and you are audited or examined before you have an opportunity to get into compliance, penalties can be very steep…reaching upwards of 100% value of your foreign account.
Foreign Account Reporting – Bank, Investment & Retirement
There is a lot of misinformation and confusion online regarding requirements report foreign bank accounts, foreign retirement accounts, foreign investment accounts, as well as the interplay between foreign account reporting for individuals and FATCA.
FBAR vs. FATCA
FBAR (report of foreign bank and financial account) and FATCA are two acronyms that are used synonymously, but they are different.
FBAR (Treasury Department Form FinCEN 114)
The FBAR aka FinCEN 114 is a form which is required to be filed by any US taxpayer who has an annual aggregate total of more than $10,000 overseas at any time during the year. It does not matter whether the money is in one bank account or scattered over numerous bank accounts; moreover, it does not matter if your account has $10,000 in it – it is important to remember that the threshold requirement is more than $10,000 in total annual aggregate of all your foreign accounts.
*Whether or not a country has entered into a FATCA agreement has no bearing on whether you as an individual or business are required to report your foreign accounts.
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives, and FATCA (Foreign Account Tax Compliance Act). Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:
- Foreign Bank Accounts
- Foreign Savings Accounts
- Foreign Investment Accounts
- Foreign Securities Accounts
- Foreign Mutual Funds
- Foreign Trusts
- Foreign Retirement Plans
- Foreign Business and/or Corporate Accounts
- Insurance Policies (including some Life Insurance)
- Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
- Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
FATCA (IRS Form 8938)
As described above, the goal of FATCA is to reduce offshore tax fraud and evasion. Like the FBAR, whether or not a foreign country has entered into a FATCA Agreement has no bearing on whether an individual has to file a FATCA form 8938. While there are many aspects and facets to FATCA, for individual taxpayers the main issue is usually the timely filing of form 8938.
Unlike the FBAR that has been unwavering threshold for filing, the threshold requirements for an 8938 vary, and are based on whether a person is married or single and/or whether they reside in the United States or outside of the United States.
U.S. Income Tax Treaty with Russia
United States and Russia have a tax treaty in place. The main purpose of the tax treaty is to ensure proper tax treatment of monies earned by US citizens, Russian citizens, ex-pats and residents of each other’s country. When a tax treaty is in place, it will usually provide for reduced taxes on passive income, the elimination of certain taxes such as foreign interest income earned by residents of the other country, and the prevention of double taxation.
Estate Tax Treaty
The United States and Russia do not have an estate tax treaty in place. Therefore, if you are a citizen or resident of Russia and/or the United States and have assets in one or both countries is important to speak with an experienced international estate planning attorney to determine what potential tax liabilities there may be. It is important to cost-effectively strategize and structure your Russian and U.S. Assets in order to provide for your beneficiaries and legacy.
Foreign Insurance – U.S. Tax
Foreign life insurance is a source of confusion for many individuals – rightly so, since the IRS has been unclear regarding the reporting requirements. Essentially, if the foreign life insurance policy has a surrender value, then it must be reported on an FBAR and/or 8938 (if the individual otherwise meets the threshold requirements).
In addition, if the insurance policy is a hybrid policy/annuity that generates current income such as interest, bonus, or dividends than that earned income must be reported as well. It generally does not matter if the income is not actually distributed and/or whether you paid foreign tax on the earnings already.
* If you paid foreign tax your generally entitled to a foreign tax credit. Click here to learn more about foreign tax credits.
**There is another form, entitled a form 720 which involves excise tax on foreign insurance premiums. While the law is not clear, the general understanding amongst most experienced practitioners is that the form is limited to employers paying excise tax and not necessarily individuals — but individuals may error on the side of caution and file the form anyway.
Russian Retirement Fund
Retirement plans from overseas countries is another bone of contention for many individuals required to file and/or pay US tax. Why? Because there may be both FBAR and FATCA Reporting requirements if the retirement fund has an individual account number (as opposed to a general fund such as government sponsored social security). Depending on the type of retirement, there might also be an 8621 (PFIC) reporting requirement that is beyond the scope of this article.
More than just reporting the account information, taxpayers may also have to pay current tax on earnings of the retirement fund even though none of the money has been distributed, and even though the fund is growing tax-free overseas.
In other words, even though a foreign retirement fund may obtain tax deferment status until distributed in the foreign country of origin, from the US tax perspective it may not receive that same tax-deferred treatment such as a 401(k). Therefore, the individual with a retirement account is required to pay current tax on earnings that were not distributed.
*If a person is required to pay current tax on the undistributed earnings they will generally receive a tax credit against any US tax due in the future once the money is distributed.
If you are a foreign national or US person with a foreign trust that is based in Russia, it is important to ensure you have had your state tax plan reviewed by US international tax attorney.
Depending on whether the trust is a grantor trust and if it is currently funded, there could be immediate tax consequences and liabilities to the owner/grantor of the trust and/or the beneficiaries as well.
Common Corporate Structures – De Facto
The United States has very strict rules when it comes to foreign corporations. In order to circumvent the very comprehensive reporting requirements necessary two get into tax compliance for foreign corporations, the IRS has laws in place to allow “disregarding of the entity.”
On a very basic level what that means is that if you have an entity such as an LLC, you may be able to disregard the entity for tax purposes. Thus, while you still have LLC protection for your business (if for example it was sued), you do not have to go through the rigorous reporting requirements of the LLC as if it was a corporation. Rather, you can simply disregard the entity and report all of the income, taxes, deductions etc. directly on your 1040 tax return form/schedule C.
When it comes to foreign businesses, certain businesses must file in the United States as a corporation. In other words, even if it is a one-person business that may seem similar to a U.S. single member LLC (SMLLC) – which would otherwise qualify for being disregarded – the IRS will not allow certain for business structures to be disregarded.
It should be noted that in Russia, the Otkrytoye Aktsionernoy Obshchestvo is an entity type structure which cannot be disregarded. Therefore, usually a form 5471 must be filed annually with the IRS and the failure to do so can lead to very high fines and penalties.
Foreign Real Estate – U.S. Tax and Reporting
If a person is a “U.S. Person” and is required to file a tax return (1040) in that they are either considered to be a US taxpayer for income tax purposes and/or meet the threshold requirements for filing, then the United States taxes individuals on their worldwide income. As such, it does not matter if the money is earned in Russia that under Russian law the earnings may be below the threshold reporting requirements for filing and paying taxes in Russia
As a US person, the United States taxes individuals on their worldwide income — including foreign rental income
Real Estate Rental Profit vs. Real Estate Rental income
Another very important distinction that is common is when a taxpayer has foreign property that earns rent income, but at the end of the day once expenses and foreign taxes are factored in there is no “profit.” Just because there is no profit does not mean there is no tax reporting requirement.
Rather, a person is required to report the gross income as well as the expenses on a Schedule E. moreover, it is important to keep in mind that under US law the deductions and exclusions a person takes for their rental property may be different than in the country in which the property is located (for better or worse) – so just because there is no profit under foreign tax law does not mean there is no profit under US tax law.
Golding & Golding Can Help You!
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
Please do not worry. We can assist you as we have assisted hundreds of clients in over 40 countries disclose upwards of $40 million in a single disclosure.
We are available seven days a week and provide flat-fee and full-service representation to our clients around the world.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.