Foreign financial asset reporting
The IRS is increasingly focused on targeted “low compliance” issues when choosing returns for audit. Of the close to 60 targeted areas, over half relate to taxation of foreign income and foreign reporting issues. If you have any interest in foreign financial assets, or even signatory authority in the case of foreign bank accounts, it’s best to make sure you’re compliant. This article attempts to very briefly touch on some of the requirements related to foreign assets.
Many have heard of FinCEN form 114, Report of Foreign Bank and Financial Accounts or “FBAR” form, which is filed with the Department of Justice when a person’s aggregate value of reportable accounts exceeds $10,000 at any time during the year. The reports must be filed electronically by April 15th but an automatic six-month extension is granted without even requesting it, making the practical due date October 15th. Reportable accounts include not just those owned outright but also those owned jointly and those owned indirectly through an entity owned more than 50% by the filer. The requirement to report accounts with signatory authority has the effect of creating a requirement even when the filer has no equitable interest in the account. It’s important to know that the value reported is the entire value of the account regardless of ownership.
Form 8938, Statement of Specified Foreign Financial Assets, is filed with one’s income tax return. Filing thresholds for this form differ based on the taxpayer’s residency (US or abroad) and filing status. Example – an unmarried taxpayer living in the U.S. has a reporting requirement when the total value of reportable foreign financial assets is more than $50,000 on the last day of the year or more than $75,000 at any time during the year. Reportable assets include (but are not limited to) financial accounts maintained by a foreign branch of a foreign financial institution; foreign stock or securities owned outright; any interest in a foreign entity; most foreign pension or retirement accounts; and any financial instrument or contract issued by a non-U.S. person. Note that accounts reported on the FBAR form are likely also reported on form 8938 when required.
There are also a whole slew of forms used to report interests in, transfers to, and transfers from foreign entities such as corporations, partnerships, estates, and trusts, and for reporting the receipt of foreign gifts and inheritances.
The penalties for non-filing any of the above forms are egregious and not to be taken lightly. The IRS offers programs whereby a non-compliant person can file back forms and amended income tax returns if necessary. Again, this article is far short of comprehensive and intended only to wake you up to the possibility of a reporting requirement. If you even suspect you might have a reportable asset, you should check with your CPA.