Foreign Asset Reporting

 

Internal Revenue Service has concentrated efforts in recent years to ensure reporting of the existence of foreign holdings, and of income earned abroad or through foreign assets.

If you are a U.S. person (U.S. citizen, green card holder, or lawful permanent resident of the U.S.) or an entity established within the U.S., or which is owned by U.S. persons, or which conducts business within the United States.

Options for U.S. Taxpayers to Disclose Foreign Financial Assets

 

Effective July 1, 2014, the IRS announced it has expanded the Streamlined Filing Compliance Procedures for non-resident, non-filer taxpayers to include taxpayers who reside in the United States. 

 

There are 4 new options available for U.S taxpayers to become compliant with their past tax and international information reporting regarding foreign financial assets:

 

1.  Offshore Voluntary Disclosed Program

This program is designed for situations where non compliance may have been willful and/or where there is significant unreported income or where sophisticated tax avoidance schemes have been employed.

 

2.  Streamlined Filing Compliance Procedures

The modified Streamlined Filing Procedures are available for individual taxpayers (including estates) to:

  • File amended or delinquent returns together with any international information returns
  • Provide terms for the taxpayer to resolve their tax and penalty obligations.

 

a.  Streamlined Foreign Offshore Procedure - For U.S. citizens or permanent residents who live outside the United States.

Taxpayers who remit their outstanding taxes and interest and disclose their foreign accounts will not be charged penalties under this procedure.

 

Filling requirements:

  • File delinquent or amended tax returns together with any required international informational returns (e.g. Forms 3520, 3520A, 5471, 5472, 8621 and 8938) for the past 3 years.
  • File delinquent or amended Report of Foreign Bank and Financial Accounts Report (FinCEN Form 114) for the past 6 years
  • Remit full amount of taxes and interest due
  • Complete and sign a certified statement for persons residing outside of the U.S

b. Streamlined Domestic Offshore Procedure - For U.S. citizens or permanent residents who reside within the United States.

Taxpayers who remit their outstanding taxes and interest and disclose their foreign accounts will be charged a reduced “Title 26 miscellaneous offshore penalty” of 5% of their undisclosed foreign financial assets. (Previously, the penalty would have been 27.5%).

 

Filling requirements:

  • File amended tax returns together with any required international informational returns (e.g. Form(s) 3520, 3520A, 5471, 5472, 8621, and 8938) for the past 3 years.
  • File delinquent or amended Report of Foreign Bank and Financial Accounts Report (FinCEN Form 114) for the past 6 years
  • Remit Title 26 miscellaneous 5% offshore penalty
  • Complete and sign a certified statement for U.S persons residing in the U.S

The taxpayer must certify that their failure to disclose their foreign financial assets and informational returns and pay their taxes on those assets was not willful.

 

Tax returns submitted to the IRS under the Steamlined Offshore Procedure will be processed like all other returns, that is, there will be no acknowledgement by the IRS and no signing of a closing agreement.

 

3.  Delinquent Report of Foreign Bank and Financial Accounts Submission Procedures

For taxpayers who have neither additional income to report nor additional tax to report and remit, but:

  • Have not filed the required Report of Foreign Bank and Financial Accounts Reports (FinCEN¬† Form 114)
  • Are not currently under either criminal investigation or civil examination by the IRS
  • Have not been contacted by the IRS regarding delinquent FBAR’s.

     

4. Delinquent International Information Return Submission Procedures

For taxpayers who have neither additional income to report nor additional tax to report and remit, but:

  • Have not filed international information returns.
  • Have reasonable cause for not filing the information returns
  • Are not currently under either criminal investigation or civil examination by the IRS
  • Have not been contacted by the IRS regarding delinquent information returns

 

Substantial penalties are assessed for failure to file any of the following applicable forms:

 

Statement of Specified Foreign Financial Assets -Form 8938

If you meet certain filing thresholds of financial assets held outside of the United States,beginning with the 2011 tax year, you will be required to file a separate form 8938 for each account or financial asset.

This new form is required in addition to any filing requirements of Treasury Form FinCEN114, and requires substantially more information regarding account values, activity, amount of income earned and where reported, and ownership of the asset.

Report of Foreign Bank and Financial Accounts -Form FinCEN 114

Form FinCEN114 requires electronic reporting of foreign bank and financial accounts, and includes such information as the maximum balance in each account each year.  Income from accounts is not reported on this form, but on schedule B of the 1040 tax return.

 

Information Return by a Shareholder of a Passive Foreign Inestment Company or Qualified Electing Fund -Form 8621

A  separate form 8621 is required to report the existence of and transactions within foreign based mutual funds, pooled investments or partnerships.

The objective of this form is to include in income any realized and unrealized income earned within foreign based funds.  Further information is available here.

 

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts -Form 3520/3520A)

Internal Revenue Service requires that Form 3520 and Form 3520A be filed each year to disclose interests in foreign trusts held by U.S. persons.  Annual Information Return of Foreign Trusts must be filed by the 15th day of the 3rd month following the end of the trust’s year end, extensions are available.

For U.S. persons with connections to Canada, the following are considered foreign trusts and Form(s) 3520 and 3520A must be filed annually:

a) Tax Free Savings Accounts (TFSA's); and
b) Registered Education Savings Plans (RESP's)

Penalties, if not timely filed, incomplete or incorrect, start at 5% of the trust value or $10,000 (whichever is greater)

 

Information Return of U.S. Persons With Respect to Certain Foreign Corporations -Form 5471

If you own more than 10% of a foreign corporation, acquire or dispose of shares of a foreign corporation so that your holdings fall above or below 10%, or if the foreign corporation is considered a "Controlled Foreign Corporation", your proportion of certain types of earnings of the corporation are included in your personal income tax return.  This inclusion under subpart f of the Internal Revenue Code is made regardless of whether any income has actually been paid to you.

Further information regarding form 5471 is available here.