Stuff You Should Know About Reporting Foreign Bank Accounts and Certain Foreign Assets to the IRS

April 4, 2012

Are you concerned, confused or baffled by the IRS foreign financial asset reporting requirements?  If you are a  U.S. citizens, green card holder or otherwise a U.S. income tax resident, the first thing you should know is that you must report and pay taxes on worldwide income.  While that particular rule is generally known, confusion arises about the disclosure forms that have been issuing from the IRS in seemingly ever-increasing number, and their companion regulations and instructions. 

Basically, you are required to report foreign assets.  These forms are informational only, i.e., no tax consequences, but failure to file the required forms in a timely manner can result in heavy penalties.  The following is a summary of what you may need to file, and when they are due, the last section being concerned with penalties. 

U.S. Treasury Form TD F 90-22.1 “Report of Foreign Bank and Financial Accounts.”  This form is commonly referred to as the “FBAR.”   Part III of Schedule B of Form 1040 reads as follows:

_____________________________

7a  At any time during 2011, did you have a financial interest in or signature authority (emphasis mine) over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?

If “Yes,” are you required to file Form TD F 90-22.1 to report that financial interest or signature authority?  See Form TD F 90-22.1 and its instructions for filing requirements and exceptions to those requirements.

b.  If you are required to file Form TD F 90-22.1, enter the name of the foreign country where the financial account is located.

 8. During 2011, did you receive a distribution from or were you a grantor of or transferor to a foreign trust? If “Yes,” you may have to file Form 3520. See instructions on back.

_____________________________

While this section of the U.S. tax return has been in existence since the 1970s, it had been largely ignored by many people, especially those living in the U.S., that is, until recent years when the IRS launched its ever widening campaign to identify unreported foreign assets owned by US taxpayers.  It is now imperative that you be aware of these forms and that you diligently conform to the filing requirements.   If you are required to file the FBAR (which is filed separately from the basic tax return), it must be filed on or before June 30th, regardless of any extension you may have to file your basic Form 1040.  

IRS Form 8938 “Statement of Foreign Financial Assets.”  This is a new form and applies for 2011 tax returns (and of course future returns), and results from the notorious FATCA law.  This form is, as they say, a doozy, and requires a close reading of its detailed companion instructions.  It is due to be filed when your basic tax return is filed, including extensions. 

When filing is not required. Neither form is required if you at no time during 2011  had $10,000 or less in aggregate foreign financial accounts and less than $50,000 in aggregate foreign financial assets, and you had no signature authority over a foreign financial account.

As stated, the FBAR must be filed by U.S. taxpayers who owned or had signature authority over foreign financial accounts with an aggrebate value exceeding $10,000 at any time during 2011. What is a “foreign financial account”?  It is includes foreign bank and brokerage accounts as well as  foreign insurance and annuity policies.  Note well, a financial account in a branch of a U.S. bank that is physically located abroad comes within the definition of a foreign financial account.  On the other hand, an account at a branch of a foreign bank that is physically located in the U.S. is not a foreign financial account.

Form 8938 is required if you have an interest in certain foreign financial assets in excess of $50,000 (or, if married filing jointly, $100,000) on the last day of the calendar year, or in excess of $75,000 ($150,000 for joint filers) at any time during the year.  If you reside abroad, higher thresholds apply: If you are not filing a joint return, they are $200,000 on December 31st or more than $300,000 at any time during the taxable year.   If you are married filing jointly, those threshholds are doubled.   Disposition of those assets may also have to be reported.   The definition of “specified foreign financial assets” includes not only assets reportable on the FBAR but also shares of stock in foreign corporations and securities of non-U.S. companies (listed companies on a foreign exchange), as well as an interest in a foreign entity (including foreign trusts and estates). If any such foreign asset is held in a U.S. account, it need not be reported.  On a positive note, for those who do not otherwise have to file a U.S. tax return, filing Form 8938 is waived.

Real estate and movable personal property outside the United States are not required to be reported EXCEPT if owned through a foreign entity.  This is most common among those who own foreign real estate through a holding company such as an SCI.  Shares of such company must be reported in Form 8938. 

Penalties:

Failure to file an FBAR.  If the failure to file is determined by the IRS to be willful, the penalty can be up to the greater of $100,000 or 50 percent of the balance in the foreign account(s).  Moreover, the penalty is assessable each year for willful failure to file.  There may also be criminal penalties.  These penalties are not automatic.  You can show absence of willful failure to file and of course if the income from theose accounts have been duly reported, it will weigh heavily in your favor in mitigating or eliminating the penalties.

Failure to file Form 8938.  The penalty for failure to file the Form 8938 is $10,000, and an additional penalty of up to $50,000 is applied if you continue not to file after a demand by the IRS.  There may be other penalties as well.


Obama’s Revenue Proposals for 2013

March 14, 2012

The times they are a-changing.  Along with other changes in the U.S. economic, social and political scene, are new tax proposals.  Here is a partial list of recently submitted proposals by the Obama administration:

These proposals are intended (if adopted by Congress) to become effective as of 1 January 2013.

•   Reinstate limitation on itemized deductions for high-income taxpayers.  If adjusted gross income (AGI) exceeds $250,000 (joint filers), $225,000 for head of household  filers, $200,000 for single persons and $100,000 for marrieds filing sepatately, the total of itemized deduction is reduced by 3% of the excess of those deductions over those amount.  

•   Reinstate phase-out of personal exemptions for high-income taxpayers.  

•   Upper income brackets raised. Top rate would become 39.6%

•   “Qualified dividends” as ordinary income for portion of those dividends that would fall into the new 36% or 39.6% income tax brackets.

•   Raise capital gain rates to 20% on the portion of capital gain income that would otherwise be taxable in the new 36% or 39.6% income tax brackets.

•   There would be modifications in the minimum required distributions of IRA and other retirement plans.

•   Estate, gift, and generation-skipping transfer taxes would be rolled back to 2009 levels:

          –  Maximum estate, gift and generation-skipping transfer (GST) tax rate would be 45%.

          – The estate tax and GST tax exemptions would each be $3.5 million,

          – The gift tax exemption would be $1 million.

          – The “portability” of unused estate and gift tax exemptions between spouses would continue.

•   Require consistency regarding basis for transfer tax and income tax purposes – An executor would be required to report the basis of property transferred at death and a donor would be required to report the basis of property transferred by gift. The recipient in either case would be required to use that basis.

•   Changes in grantor trust taxation.  These will be elaborated in a later Blog entry if they become law.

Discussion: Although dependent in large part on the outcome of the next presidential and congressional elections, it would be wise for anyone with a large estate to take advantage of the high ($5,000,000) estate tax exemption by making gifts to intended beneficiaries (e.g,, children) before 31 December 2012. 


Obama’s Revenue Proposals for 2013

March 14, 2012

The times they are a-changing.  Along with other changes in the U.S. economic, social and political scene, are new tax proposals.  Here is a partial list of recently submitted proposals by the Obama administration:

These proposals are intended (if adopted by Congress) to become effective as of 1 January 2013.

•   Reinstate limitation on itemized deductions for high-income taxpayers.  If adjusted gross income (AGI) exceeds $250,000 (joint filers), $225,000 for head of household  filers, $200,000 for single persons and $100,000 for marrieds filing sepatately, the total of itemized deduction is reduced by 3% of the excess of those deductions over those amount.  

•   Reinstate phase-out of personal exemptions for high-income taxpayers.  

•   Upper income brackets raised. Top rate would become 39.6%

•   “Qualified dividends” as ordinary income for portion of those dividends that would fall into the new 36% or 39.6% income tax brackets.

•   Raise capital gain rates to 20% on the portion of capital gain income that would otherwise be taxable in the new 36% or 39.6% income tax brackets.

•   There would be modifications in the minimum required distributions of IRA and other retirement plans.

•   Estate, gift, and generation-skipping transfer taxes would be rolled back to 2009 levels:

          –  Maximum estate, gift and generation-skipping transfer (GST) tax rate would be 45%.

          – The estate tax and GST tax exemptions would each be $3.5 million,

          – The gift tax exemption would be $1 million.

          – The “portability” of unused estate and gift tax exemptions between spouses would continue.

•   Require consistency regarding basis for transfer tax and income tax purposes – An executor would be required to report the basis of property transferred at death and a donor would be required to report the basis of property transferred by gift. The recipient in either case would be required to use that basis.

•   Changes in grantor trust taxation.  These will be elaborated in a later Blog entry if they become law.

Discussion: Although dependent in large part on the outcome of the next presidential and congressional elections, it would be wise for anyone with a large estate to take advantage of the high ($5,000,000) estate tax exemption by making gifts to intended beneficiaries (e.g,, children) before 31 December 2012. 


Interim report on new French trust law; angst and action

October 28, 2011

The worrisome new French law that sets out a comprehensive set of rules with respect to the reporting and taxation of trusts, has already partially taken effect and will be in full force and effect on 1 January 2012.   The new rules are still not totally clear; we are awaiting clarification on some points by the tax administration.  Despite scattered reporting in the press and a raft of website commentaries, as well as my own detailed Memo distributed to clients and others whom I felt would be interested, there has been relatively few inquiries from clients with existing trusts (or who are beneficiaries of trusts or future beneficiaries of testamentary trusts created, for example, in their parents’ will), concerning how the new law will impact on their French reporting and tax obligations as from 1 January 2012.  An explanation for this may be that the law slipped by them during the halycon days of summer and, additionally, I intuit that many are just not ready to consider its full implications.   For those who have responded, actions being considered range from unwinding the family trust entirely (to the extent possible or practicable), requesting parents or others to revise their wills to take out any trust provisions that would affect a French fiscal resident, to simply disregarding the new rules (not recommended), and even to leaving France if there is no other alternative.  There are not many viable alternatives at this point.  Hopefully, as we give more thought to the new law, as clients discuss their own unique fact situations (which may help us to conjure up some creative ideas) and, just possibly, if the French legislature  design some safe havens or other options, ways of dealing with this impending disaster will emerge.  For now, though, no one affected by the new law should hesitate to take appropriate.   Again, you may request a copy of my Memo concerning the new law at mail@okoshken.com.


New Capital Gains Law in France – Sale of Secondary Residence

September 19, 2011

The French tax rule, that sale of a secondary residence owned for 15 years or more is exempt from capital gains tax, has been changed.   The French legislature has just extended that holding period to 30 years!  The new rule (except for transfers to an SCI which is owned by one or more of the original owners of the propertty being transferred) is effective as from February 1, 2012.   Thus, to achieve total tax exemption, your period of ownership must be at least 30 years at the time of the sale.   If the property is, or shares of a property holding company are, transferred to a French real estate holding company (SCI), the applicable date for initiation of the new rules is August 25, 2011.  

Summary of the how the new rules will apply

During the first 5 years of ownership, the full gain is taxed.   

Between 6 – 17 years, the reduction is 2% per year. 

Between 18 – 24 years of holding, the reduction is 4% per year. 

During the last five years, the reduction in 8% per year. 

Ownership of the property through an SCI does not affect this rule, i.e., the SCI shreholders benefit from the capital gain reduction benefits that are listed above. However, if the SCI engages in furnished rentals and is thus treated for tax purposes as a commercial company, the property does not qualify at all for the exemption.    

N.B.:  U.S. citizens are nevertheless taxable in the U.S. on such sale.  The I.R.S. does not follow the French taxing rules.  Of course, if you owned the property for less than 30 years at the time of sale and consequently must pay some French capital gains tax, you may claim an offset of that French tax against any U.S. tax paid on the same gain.   The offset is referred to as the foreign tax credit

The new law came into effect on 20 September 2011.


Recent French Tax Laws

September 16, 2011

On July 6, 2011, the French legislature enacted a sweeping law that affects:  (1) wealth tax, (2) gifts and inheritance, and (3) trusts, (4) taxation of life insurance.  If you wish to receive our recent detailed memo discussing the first three items, please contact mail@okoshken.com to request it.  It will be sent to you by email. 

The most sweeping and problematical changes are contained in the new trust law.  They affect non-residents as well as fiscal residents of France.  Practically speaking, the French law does not provide for the creation of trusts.  However, French courts as well as the “fisc” (the French tax authorities), have accepted their existence, but have sought to work out a way of dealing with them for property purposes but, more importantly, for tax purposes.   This portion of the new law, effective as of 2012, makes some dramatic changes to how trust holdings are taxed, including the timing of the tax as well as the rate of tax, and also creates reporting requirements by trustees to the French fisc.  Some standard tax planning techniques are now in jeopardy, and in some cases, those who are beneficiaries of large trusts may have to re-think whether to become French fiscal residents and certainly have to think twice about setting up a trust once they have already become French residents.

The changes in the wealth tax rules (ISF) will result in lower wealth tax for most and no wealth tax for some.  However, reporting requirements are tightened and penalties will be applied for failure to report.   A major change:  shareholder loans to a real estate holding company (SCI, LLC, S-Corp, etc.) are no longer taken into account in valuing the holding company shares for wealth tax purposes.

Gifts and inheritances see some dramatic changes, including an increase in the top rate between parents and children (as well as in the direct line of descent and ascent), from 40% to 45%.  Other changes result in certain gifts being taxed at 60% when in the past they would have been taxed at lower rates.    

Another tax change which, at this writing, has been enacted but not yet published, is the capital gains law that would increase the period for obtaining total exemption from the capital gains tax on the same of a secondary residence in France from 15 years to 30 years.


Be wary of making anonymous political contributions in excess of $13,000

May 11, 2011

This is a letter from the IRS to a taxpayer (name redacted), indicating that ananymous gifts (or any gifts) in excess of $13,000 to a 501(c)(4) organization may be subject to US gift tax.

“The Internal Revenue Service has received information that you donated cash to [REDACTED], an IRC Section 501(c)(4) organization,” the agent wrote to a donor. “Donations to 501(c)(4) organizations are taxable gifts and your contribution in 2008 should have been reported on your 2008 Federal Gift Tax Return (Form 709).”