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.
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.