Undisclosed Foreign Investments (2018) – 5 Reportable Offshore Investments
Unfortunately, when offshore reporting involves Foreign Investments, even the IRS is not clear on what needs to be reported the IRS.
Undisclosed Foreign Investments
Presumably, the IRS likes to keep the reporting of foreign investments ambiguous, so that the IRS can more easily catch you and penalize you for not being in compliance.
Even though the IRS seems to be working toward providing improved clarity about what assets or investments need to be reported, it is still woefully inadequate in placing people on notice of what investments must be reported.
5 Common Foreign Investments
The following is a brief summary of common offshore investments our clients have, that often go unreported and places the client in a potential penalty situation with the IRS:
Provident Funds (including Superannuations)
A Provident Fund is a foreign retirement or pension scheme, in which an employer (and typically the employee) are required to invest in the fund with the idea of it growing tax-free — and the person not taking distributions until they are in retirement (or no longer a resident of that country).
Provident Funds vary significantly depending on the country and whether that country taxes the income either when it is contributed, while it is growing, or when it is distributed to the individual.
Nevertheless, even if a person is not taking distributions or receiving any income, typically the Provident Fund needs to be reported on the FBAR. In addition, depending on the specifics –vit may also need to be filed on a form 8621 or 3520.
** If the United States has entered into a FATCA Agreement with a country in which there is a Provident Fund and the agreement says the fund is exempted from reporting, that does not mean that you are exempted from reporting as well. In other words, as an individual you would still have to report the fund to the IRS and FinCEN.
Foreign Mutual Funds
Many of our clients have invested in foreign mutual funds around the world. They have not taken any distributions, they did not receive any 1099 or 1099 equivalent, and pretty much have no idea how much money it might be generating.
Even if you do not know the amount of the investment, from the IRS’ perspective, you are responsible for obtaining the information, so that you can properly report the investment to the IRS on an FBAR, and usually a Form 8621.
Foreign Life Insurance Policies
For many of our clients, it is commonplace to have foreign life insurance policies in whichever countries they have investments in. That is because, many times these policies are used for investment purposes, and also have the investment component to them. Usually, the interest, dividends or capital gains is growing tax-free — and therefore increasing the value of the life insurance policy — even if no distributions are being made.
Life Insurance Policy Reporting is complex. We have written a comprehensive article on it, which can be found here usually it will include filing an FBAR, Form 8938, and Form 720 (if there are currently Life insurance premium payments being made to the policy).
** if the policy does not have a surrender value it may impact the reporting, but this is often negated if there is an investment component to it — which may require from 8621.
Foreign Business or Partnerships
When a person has invested in a foreign partnership, business or other foreign entity there may be significant reporting requirements. Oftentimes, this will vary depending on whether the person received an interest in the taxable year (and how much interest the person owns), and/or whether the value the interest exceeds more than 10%.
There are many considerations in determining whether a person will have to report the foreign business mn a form 8938 (which is a more simplified reporting) or whether they have to complete one of the much more comprehensive International informational returns such as a form 5471, 5472, or 8865.
Many of our clients come from New Zealand and Asia, where it is commonplace to have a trust. This is especially true for our clients that have amassed significant wealth and want to pass that wealth on to their children (in some countries the grantor will receive a tax benefit by putting their money into trust –- such as reduced estate taxes — which the IRS may not recognize).
**It should be noted that the IRS hates foreign trusts just as much as it hates foreign mutual funds. The foreign trust must be reported on a form 3520-A in order to summarize the trust assets, income, distribution, and other related activities of the trust.
Out of Foreign Investment Compliance?
If you have not properly reported your foreign investments to the US government and/or include the income in your tax return, you could be subject to extensive fines and penalties.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.