International Taxation: Reporting Requirements for Foreign Financial Assets
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:
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);
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;
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
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 last day of the tax year or $75,000 at any time during the tax year to report information about those assets on Form 8938, which must be attached to the taxpayer’s annual income tax return. Form 8938 reporting applies to specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010. This interest refers to any income, gains, losses, deductions, credits, gross proceeds or distributions from holding or disposing of the account or asset or would be required to be reported, included, or otherwise reflected on an individual’s income tax return.
Failure to file a Form 8938 that is due is punishable by civil penalty of $10,000 for each month of the noncompliance, up to a maximum of $60,000 per taxable year. A taxpayer who willfully files a materially false income tax return, or who willfully fails to file an income tax return when there is income to report and tax due on it, is subject to criminal penalties.
The IRS has a long-standing policy that it will not prosecute a taxpayer who voluntarily complies with the law. Currently, disclosures must be made in writing to the IRS Criminal Investigation Division, and the program is only available if the IRS has not yet begun an investigation regarding the taxpayer.
As foreign financial asset reporting compliance is becoming an increasingly important issue, please feel free to call or email your ECS contact to discuss this topic in greater detail and to determine whether there are any tax implications for you.
2014 Tax Due Dates:
April 30th –
1st quarter 2014 employer payroll tax returns due
May 31st –
Monthly Illinois wage report for April due (employers with 50 or more employees)
June 16th –
2nd estimated tax payments for 2014 due for Individuals and Corporations
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