Tax Service Planning
Foreign Asset Reporting
Do you have income overseas you forgot to report? Did Grandpa leave you his foreign bank account when he passed away? Foreign tax matters are very complex and nerve-wracking.
Contact us for evaluation of your foreign asset reporting dilemma. We work with attorneys who specialize in this field and as a team we can obtain the best possible outcome.
FinCEN Report 114
If you have foreign bank or investment accounts holding more than $10,000 in the aggregate anytime during the year, you are now required to file FinCEN Report 114 (Report of Foreign Bank and Financial Accounts) by April 15th of the following year, with an automatic six month extension granted (Note new due date in 2017). Report 114 is required to be e-filed through the Bank Secrecy Act (BSA) e-filing system. It doesn’t matter whether the foreign accounts generate income or not; just owning them, or having signature authority, requires you to file.
Failure to file can result in serious consequences. The sanctions for not completing FinCEN Report 114 include numerous severe civil penalties and potential prosecution followed by a term in federal prison.
Schedule B is normally filed as part of the taxpayer’s individual income tax return, if the taxpayer had over $1,500 of taxable interest or ordinary dividends during the year. Federal law also requires U.S. citizens and resident aliens to include Schedule B, even if they did not earn over $1,500 of taxable interest or ordinary dividends, IF they have a financial interest in, or signature authority over a financial account in a foreign country.
Beginning in 2011, the IRS has added Form 8938 to the individual 1040 tax return, further tightening the noose on taxpayers failing to report ownership of overseas accounts. The sanctions for not completing and attaching the form (when required) include numerous severe civil penalties and potential prosecution followed by a term in federal prison. If you fail to file Form 8938 or fail to report a specified foreign financial asset that you are required to report, the statute of limitations for the tax year may remain open for your income tax return (Form 1040) until three years after the date you file a complete and accurate Form 8938.
Assets that must be reported include: Any financial account maintained by a foreign financial institution
- To the extent held for investment and not held in a financial account:
- Stock or securities issued by someone that is not a U.S. person
- Interest in a foreign entity
- Any financial instrument or contract with an issuer or counterparty that is not a U.S. person
Foreign Account Tax Compliance Act (FATCA) Deadline
If the thought has crossed your mind to not file and hope for the best, think again. The final phase of the Foreign Account Tax Compliance Act (FATCA) has now gone into effect, requiring international financial institutions to turn over all the information on their US account holders.
IRS Voluntary Disclosure Program
Since 2009, the IRS has announced various initiatives for taxpayers with unreported foreign assets. The Offshore Voluntary Disclosure Program (OVDP) requires filing 8 years of amended tax returns and 8 years of Foreign Bank Account Reports (FinCEN Report 114). In addition to paying 8 years of taxes, taxpayers must pay a 20% “accuracy” penalty on the tax plus interest. Taxpayers must also pay a 27 1/2 % “FBAR-related” penalty on the highest balance of their foreign assests in the 8 year period.
In June 2014 the IRS announced major changes to the OVDP which results in additional decisions for taxpayers: First, U.S. residents who did not report foreign income or assets but who certify that their non-compliance was “non-willful”, do not need to enter the OVDP, but can participate in the Streamlined Filing Compliance Procedures (“SFCP”) by filing only 3 years amended returns and 6 years of FinCEN Report 114. No income tax penalty and only a 5% “FBAR-related” penalty are due.
Second, those who cannot certify that their non-compliance was “non-willful” can still join the OVDP. There is now a third category of those who enter the program after it becomes public that their foreign bank is under investigation by the IRS or Department of Justice. For these taxpayers, the June 2014 changes increase the 27 1/2 % penalty to 50% of the highest balance (of the taxpayer’s foreign assets during the preceding 8 years). Close to 100 Swiss banks are currently negotiating to enter into Non-Prosecution Agreements with the IRS, so the risk of facing a 50% penalty is growing.
While the current voluntary disclosure program does not have a final end date, the rules can change at any time. The penalties are far greater if you don’t “get with the program and then get caught. In addition, disclosing now allows you to transfer the money to your American accounts as well as to implement gifting and other estate planning strategies.
An Additional Wrinkle: PFICs
Passive Foreign Investment Companies (PFICs) sound like an exotic and highly specialized investment and it’s easy to assume that you don’t own any. However, this conclusion would be a mistake as PFICs include hedge funds, money market accounts, mutual funds, private equity funds and a long list of other foreign investments. The tax calculation on unreported PFIC income is both onerous and complicated.
Foreign Inheritance: Form 3520
Even when a foreign inheritance is not taxable, the IRS likes to keep tabs on it. Generally, U.S. citizens receiving the aggregate amount of $100,000 or more in gifts and/or bequests or a foreign estate must report those amounts on the IRS Form 3520 -Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Failure to file (and even late filing of the form) may result in substantial penalties, unless the taxpayer can demonstrate that failure to comply was due to a reasonable cause and not willful neglect. To view the Form 3520 click here: Form 3520