American’s With Foreign Accounts, Listen Up
If the total balance of your foreign financial accounts exceeds $10,000 at any time during a calendar year, then you must file an “FBAR” (FinCEN Form 114, Annual Report of Foreign Bank and Financial Accounts) with the US government for that year.
An FBAR for a given year is due on the same date as your US income tax return for that year—the succeeding April 15th.
Extending your US income tax return automatically also extends your FBAR.
There is a $10,000 penalty for failure to file an FBAR.
If the failure to file is willful, the penalty increases to the greater of $100,000 of your high aggregate balance of foreign financial accounts for the year. It is even possible to be criminally prosecuted for failing to file an FBAR, although such prosecutions are rare.
Income generated by your foreign financial accounts must be reported on your US income tax return.
Such income includes interest and dividends, re-portable on Schedule B, and capital gains, re-portable on Schedule D.
If you file a Schedule B, you must truthfully answer questions in Part III about your foreign financial accounts.
If you meet the filing threshold of Form 8938, Statement of Specified Foreign Financial Assets, then you must file Form 8938 with your U.S. income tax return.
For a resident of the United States, the Form 8938 filing threshold is an aggregate balance of foreign financial accounts exceeding $50,000 at any time during the tax year, or exceeding $75,000 on the last day of the tax year; these amounts double for taxpayers filing a joint income tax return.
For a non-resident of the United States, the Form 8938 filing threshold is an aggregate balance of foreign financial accounts exceeding $200,000 at any time during the tax year, or exceeding $300,000 on the last day of the tax year; these amounts double for taxpayers filing a joint income tax return.
Unlike US-based mutual funds, foreign mutual funds do not report their shareholders’ proportionate shares of the funds’ interest income, dividend income, or capital gains or losses.
The US Congress thus perceived foreign mutual funds as deferring recognition of income, and converting ordinary income into capital gains.
Congress’ answer was to add the personal foreign investment company (“PFIC”) provisions to the Internal Revenue Code. This taxes gain on sale of a PFIC interest at the highest marginal rate for ordinary income (currently, 39.6%), and imposes an interest charge.
A PFIC holder can elect an alternative “mark-to-market” regime, but implementation of it is administratively burdensome and expensive.
The owner of a PFIC interest must report the interest on a Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, filed with his or her US income tax return.
If you own an interest in a foreign corporation, or you are an an Officer or Director of a foreign corporation, you may be required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, with your US income tax return.
If you own an interest in a foreign partnership, you may be required to file Form 8865, Return of US Persons With Respect to Certain Foreign Partnerships, with your U.S. income tax return.
You must file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, if (1) you who transferred property to a foreign trust in exchange for an obligation during the tax year; (2) you are treated as owner of any part of the assets of a foreign trust under the Internal Revenue Code’s grantor trust rules; (3) you received a distribution from a foreign trust during the tax year, or a loan from a foreign trust that could be treated as a distribution; (4) you received more than $100,000 from a nonresident alien individual or a foreign estate during the tax year, which you treat as a gift; or (5) you received more than $15,671 from a foreign corporation during the tax year, which you treat as a gift.
You are subject to penalties for noncompliance with income tax laws.
If you under report tax on an income tax return, the omitted tax is subject to a penalty equal to 20% of the tax or, if the under reporting is found to be fraudulent, a civil fraud penalty equal to 75% of the omitted tax. Failure to file a Form 8938, a Form 5471, or a Form 8865 is subject to a $10,000 penalty. There is a substantial penalty for failure to file Form 3520.
You can be criminally prosecuted if you owe tax and you fail to file an income tax return, or if you materially, willfully under report tax on an income tax return.
Such prosecutions are rare, but they do happen
IRS voluntary compliance programs enable taxpayers to minimize the cost of becoming compliant with foreign accounts laws.
But you can avail of these only so long as the IRS is unaware of your noncompliance.
Therefore it behooves you to become compliant with US laws concerning your foreign financial accounts as soon as possible.
To start you should seek the counsel of a tax attorney experienced in foreign accounts compliance.