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International Taxation: Reporting Requirements for Foreign Financial Assets

April 29, 2014


 

 

The IRS has recently focused attention and resources on ensuring foreign financial asset reporting compliance. Each of these two forms has its own filing requirements and filing obligations for affected taxpayers:

 

  • Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the “FBAR” form)

  • Form 8938, Statement of Specified Foreign Financial Assets

 

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)

 

The United States taxes its citizens and resident aliens on their worldwide income, permitting income tax which they must pay to foreign jurisdictions to be credited against their U.S. tax liability. U.S. law requires a “United States person” who has a financial interest in or signature or other authority over one or more foreign financial accounts to file an FBAR form if the total value of the foreign financial account or accounts exceeds $10,000 at any time during the calendar year. The term “United States person” includes U.S. citizens, residents, and entities – such as trusts, estates, corporations, partnerships, or LLCs – created or organized under U.S. law.

 

A United States person has a financial interest in a foreign financial account if:

  1. The U.S.  person owns the foreign financial account (even if the account is held for the benefit of another U.S. or foreign person);

  2. A person owns the foreign financial account and acts as an agent, nominee, or attorney, or otherwise acts on behalf of the U.S. person;

  3. The owner of the foreign financial account is a corporation or partnership in which the U.S. person directly or indirectly owns more than 50% of either the total share value or voting power (or more than a 50% interest in either the partnership profits or partnership capital); or

  4. The owner of the foreign financial account is a trust in which the United States person has a present beneficial interest in more than 50% of the assets (or from which the United States person receives more than 50% of the income).

 

There are severe penalties for failure to comply with foreign entity reporting requirements. Civil penalties up to a maximum of $10,000 per violation may be imposed unless reasonable cause exists for the violation. Willful failure to report an account or an account’s identifying information however may result in a penalty that is the greater of $100,000 or 50% of the value of the reportable assets on the reporting date, December 31.

 

The IRS has offered initiatives for U.S. persons delinquent in filing FBARs to voluntarily comply with the law. Under the current Offshore Voluntary Disclosure Initiative (OVDI), the maximum penalty is 27.5% of the highest value of the accounts during the reporting period, provided the reporting person complies with all of the OVDI requirements.  One of those requirements includes amending the taxpayer’s federal income tax returns for the last eight years to report income realized on the foreign accounts. It is important to note that this program is voluntary, which means it is not available once the IRS has contacted the account holder about the delinquency or initiated an investigation regarding the delinquency.

 

Form 8938, Statement of Specified Foreign Financial Assets

 

The Hiring Incentives to Restore Employment Act, Section 511, enacted March 18, 2010, imposed a reporting requirement for foreign financial assets, in addition to the requirement of filing an FBAR. Codified as Internal Revenue Code Section 6038D, the law applies to specified individuals with specified foreign financial assets which satisfy the reporting threshold. The term “specified individuals” includes U.S. citizens, resident aliens and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold.

 

The IRC mentioned above requires certain U.S. taxpayers holding specified foreign financial assets with a value of $50,000 on the las