Foreign-Based Assets, FBAR and Foreign Financial Assets Filing Requirements
MEDOWS CPA, PLLC clientele include many who have significant financial assets abroad. Whether you are a US resident, citizen, non-resident who files jointly or a non-resident who lives in a US territory, at MEDOWS CPA, PLLC our CPAs in NYC can help with reporting your financial assets to the IRS in order to avoid penalties.
If you have a financial interest in, or signature or other authority over, a financial account in a foreign country, such as a bank account, brokerage account, mutual fund, unit trust, or other financial account, you may be required to report this to the U.S. government under the Bank Secrecy Act. Taxpayers use FinCEN Report 114, Report of Foreign Bank and Financial Accounts (known as the “FBAR”), if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. The instructions are fairly straightforward, asking for account numbers, taxpayer identification number, country in which the account is held and the like. The FBAR is due June 30 (with some exceptions). The FBAR is not filed with the taxpayer’s income tax return but directly with the Treasury Department electronically.
Generally, under final FBAR regulations issued in 2011, the Treasury Department has defined the term ‘‘bank account’’ to mean a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. The term ‘‘securities account’’ means an account with a person engaged in the business of buying, selling, holding or trading stock or other securities. The term ‘‘other financial account’’ means (i) an account with a person that is in the business of accepting deposits as a financial agency; (ii) an account that is an insurance or annuity policy with a cash value; (iii) an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or (iv) an account with a mutual fund or similar pooled fund or other investment fund. Of course, there are exceptions. Please contact our office for details about the exceptions.
Failure to file the FBAR and disclose offshore accounts subjects the taxpayer to stiff penalties. In addition to penalties assessed on failing to report income for US tax purposes from these accounts, the IRS can assess penalties for simply failing to disclosure the existence of the accounts. Taxpayers failing to report their foreign financial accounts risk a civil penalty of $10,000. If the failure is willful, the penalty jumps to $100,000 or 50 percent of the account.
In 2010, Congress passed a new filing requirement in the Foreign Account Tax Compliance Act (FATCA) for certain individuals holding specified foreign financial assets. The IRS has developed Form 8938, Statement of Specified Foreign Financial Assets. Generally, specified individuals must file Form 8938 if they hold specified foreign financial assets exceeding certain monetary thresholds. The thresholds vary for single taxpayers, married couples filing jointly, married couples filing separately, and taxpayers who live abroad.
Generally, the IRS has explained that a specified foreign financial asset includes any financial account maintained by a foreign financial institution; Other foreign financial assets, which include stock or securities issued by someone other than a U.S. person,any interest in a foreign entity, and any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person, that are held for investment and not held in an account maintained by a financial institution. According to the IRS, examples of other specified foreign financial assets (not an exhaustive list) include, if they are held for investment: stock issued by a foreign corporation; a capital or profits interest in a foreign partnership; and interest in a foreign trust or foreign estate.
Offshore voluntary disclosure program reopened
In early 2012, the IRS reopened its offshore voluntary disclosure program. The IRS had previously conducted two offshore voluntary disclosures programs (one in 2009 and one in 2011). The IRS reported that interest in the 2011 program remained high after it closed in September 2011. In response, the IRS reopened the program.
Like the 2009 and 2011 programs, the reopened third program offers taxpayers a reduced penalty framework in exchange for disclosure of unreported foreign accounts. In certain cases, a taxpayer may qualify for a reduced penalty. The reopened, third program requires careful planning and preparation by potential participants.
If you own real property outside of the U.S., you may claim a deduction for property taxes paid to a foreign jurisdiction on Schedule A of Form 1040, the same as you would for domestic real property. If this property has been your principal residence for two of the past five years and you sell the property, you may exclude gain on the sale subject to the same rules as for a domestic residence (a maximum exclusion of $250,000, $500,000 for joint filers; a surviving spouse can continue to use the $500,000 exclusion if the jointly owned residence is sold within two years after the death of the individual’s spouse). Although an itemized deduction is generally available for taxes paid on personal property, this deduction is not available for taxes paid on personal property held outside the U.S. However, if this property is used in connection with a trade or business or for the production of income, a deduction for the taxes may be taken in connection with that income on the appropriate form or schedule.
If you have intangible assets in a foreign country, such as a patent, license, trademark or copyright, taxation of the income derived from the ownership or use of these assets may be subject to different rules in comparison with similar domestic income. Note also that the rules for taxation of foreign income as contained in the Internal Revenue Code may be altered by treaty. The U.S. has income tax treaties with many nations. Treaty provisions are treated as equal in weight to statutory law, and some provisions may be overridden by Tax Code provisions. The general rule is that the last in time is controlling. Tax treaties are subject to continuous renegotiation, so it is important to have current information, just as you would want with Tax Code provisions. Please consult our office regarding the applicability of tax treaty provisions with respect to foreign-sourced income.
Income from all sources must be reported in U.S. currency, regardless of how it is paid. However, if you have received income in a currency that is not convertible to U.S. currency because of that country’s laws, you have a choice in reporting. Income paid in “blocked” currency, as it is called, may either be reported in the tax year when earned according to the most accurate valuation means available and taxes paid from other funds, or you may delay the reporting of the income until the currency becomes unblocked.
Because tax rules for foreign-sourced income and on foreign-based assets may be different from domestic tax treatment, there are many additional layers of complexity. If you have additional questions regarding tax treatment of particular items, please do not hesitate to contact our office of foreign tax CPAs in NYC
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts. Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS. In addition, FATCA requires foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
Reporting by U.S. Taxpayers Holding Foreign Financial Assets
U.S. taxpayers holding foreign financial assets may be required to report certain information about those assets on Form 8938, Statement of Specified Foreign Financial Assets. Taxpayers must attach Form 8938 to their annual tax return. Reporting applies for assets held in tax years beginning after March 18, 2010.
Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the United States and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
The thresholds for taxpayers who reside abroad are higher. For example, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
A specified foreign financial asset is:
- Any financial account maintained by a foreign financial institution. This does not include a U.S. payer (such as a U.S. domestic financial institution), the foreign branch of a U.S. financial institution, or the U.S. branch of a foreign financial institution.
- Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely:
- Stock or securities issued by someone other than a U.S. person
- Any interest in a foreign entity, and
- Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory. However, Form 8938 is not required of individuals who do not have an income tax return filing requirement. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets are subject to an additional substantial understatement penalty of 40 percent.
Reporting by Foreign Financial Institutions
FATCA also requires foreign financial institutions (“FFIs”) to report information directly to the IRS about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI must enter into a special agreement with the IRS (or a more general model intergovernmental agreement (IGA) must be in place) by June 30, 2014. This deadline had been set for January 1, 2014, but was extended six-months to enable additional IGAs to be executed between the U.S. and other foreign governments. Under these agreements a “participating” FFI will be obligated to:
- Undertake certain identification and due diligence procedures with respect to its accountholders;
- Report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership;
- Withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.
Due to the high penalties involved, it is important that you understand your Form 8938 filing requirements. Please call our office at your earliest convenience to discuss your foreign financial assets with a NYC CPA.