U.S. Citizens Living Abroad File IRS Tax Returns, FBAR and FATCA
U.S. Citizens Living Abroad File Tax Returns, FBAR, and FATCA, which required them to disclose overseas (and U.S.) income, assets, accounts and investments.
A common misconception for U.S. Citizens and Legal Permanent Residents (Green-Card Holders) is that moving abroad will free them from the shackles of the US tax system.
Unfortunately, it does not work that easily.
Generally speaking, even when a U.S. Citizen or Legal Permanent Resident resides outside of United States they are still required to file all of the same tax forms the individual would have to file if the person resided in the United States — unless they have expatriated (aka relinquished/renounced their U.S. Status)
Why Do US Citizens and Resident Aliens Abroad Still File?
Unlike nearly every other country in the world, the US tax system (for individuals) is not based on residency — it is based on U.S. Citizenship and U.S. Person status.
A U.S. person which generally includes:
- U.S. Citizen
- Legal Permanent Resident, or
- Foreign National meets the Substantial Presence Test
If you fall into one of these three (3) categories, you are still required to file a U.S. tax return each year — whether or not your income is U.S. sourced or foreign sourced.
*A person may be able to minimize U.S. tax liability by using FEIE, FTC, or a hybrid of both.
FBAR (FinCEN 114)
The FBAR is the Report of Foreign Bank and Financial Account Form. It is generally filed each year when a person is considered a U.S. person and their annual aggregate account value (total of all foreign financial accounts) exceeds $10,000 USD on any given day of the year.
It does not matter if the U.S. person resides outside of United States or inside the United States — the form is still required. This is true, even if the person does not meet the threshold for having to actually file a form 1040 (as long as they are considered a U.S. Person)
To learn more about the basics of FBAR reporting, you can click here, or search our international tax library.
FATCA Form 8938
FATCA is the Foreign Account Tax Compliance Act. Both the Foreign Financial Institution and the individual each have their own reporting requirements.
Generally, the purpose of the form is from an individual standpoint is for individuals to report specified foreign financial assets that they own outside of the U.S., to the IRS.
In addition, the individual must also include any income that is generated from the foreign financial assets, along with a breakdown of the type of income that was generated.
Moreover, a person must identify more specific issues such as:
- Whether the account was opened in the current year
- Whether the account was closed in the current year
- Whether the account generated any tax liability
- Whether the account was jointly owned with this fast
The reporting requirements vary depending on whether the person files Single or Separate versus Married Filing Jointly — and whether or not the person is considered a foreign resident for filing purposes.
To learn more about the basics of FATCA reporting, you can click here, or search our international tax library.
Additional Reporting Requirements
Beyond merely FBAR and FATCA, there are other forms of a person may have to file as well (whether or not they reside in the United States for abroad).
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
Safely Get Into IRS Offshore Compliance
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
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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.)