Disclosure of Foreign Assets by US Taxpayers (Examples)

Disclosure of Foreign Assets by U.S. Taxpayers (with Examples)

Disclosure of Foreign Assets by U.S. Taxpayers

Each year, U.S. Taxpayers across the globe who have ownership of foreign assets, investments, accounts, trusts, entities, etc. (‘Foreign Assets’) are required to disclose their information to the IRS on various international information reporting forms. The different tax forms vary based on complexity, filing requirements, and reporting thresholds — and sometimes the Taxpayer may have to report the same foreign asset on multiple different IRS foreign tax forms in the same tax year. The failure to report these foreign assets to the IRS (and FinCEN) may result in significant fines and penalties, but the IRS has also developed various offshore tax and reporting amnesty programs to assist Taxpayers with safely getting into compliance and regaining their peace of mind. Let’s walk through some of the basics of disclosing foreign assets to the U.S. government with a few different examples.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

Foreign Bank Accounts

Foreign bank accounts are the most common foreign assets that many U.S. Taxpayers have. Whether it is because the Taxpayer lived in a foreign country, worked in a foreign country, or invested in a foreign country, having a foreign bank account is relatively common. When a Taxpayer has a foreign bank account, they may have to report that foreign bank account on multiple international information reporting forms.

• • • Example 1: Michelle lives in a foreign country and has five different bank accounts. Some of the bank accounts are above $10,000 and some of the bank accounts are below $5,000. Since the aggregate annual total of the foreign accounts exceeds $10,000, all 5 bank accounts are reportable on the FBAR. Since Michelle files as “Single” on her tax return and the maximum value of her accounts combined in the year was $170,000, she does not have to file the Form 8938 (since it is under the threshold reporting for 8938).

    • Example 2: Janine lives overseas and has three bank accounts with a total maximum value of $340,000. Janine also files as “Single” on her tax return, but because the maximum value of her foreign accounts exceeded $300,000 during the year, she will file both the FBAR and Form 8938.

    • Example 3: David lives overseas and also files “Single” on his tax return and has one bank account with $700,000 and no income from any sources. David will file the FBAR, but since David is not required to file a tax return, he does not need to file Form 8938 even though the maximum value of his account exceeds the filing threshold for Form 8938.

Foreign Stock Accounts and Individually Held Stock

Foreign stock is reportable, but depending on whether the foreign stock is in an account or whether it is held directly will impact what type of reporting may be required:

• • • Example 1: Brenda lives in the United States and has $90,000 in a foreign stock account. Since Brenda files “Single,” she will have to file both the FBAR and Form 8938.

    • Example 2: Brian lives in a foreign country and has a single bank account with $7,000 in it and directly held stock worth $750,000. Since Brian has a significant amount of income, he is required to file the tax return and is also required to file Form 8938 to report the directly held stock. But, since the total value of Brian’s financial accounts is less than $10,000, he is not required to file the FBAR.

    • Example 3: The same facts as Example 2 except Brian has a stock account with $750,000 in it and does not directly own stock. In this example, Brian would now be required to file both the FBAR and Form 8938.

Foreign Mutual Funds and ETFs

Unfortunately, in most situations, foreign mutual funds and foreign ETFs will qualify as PFIC — Passive Foreign Investment Companies. As a result, the Taxpayer may be required to file multiple forms each year depending on how the pooled funds are held and whether they are held directly or in a foreign account with other non-PFIC.

• • • Example 1: Scott owns $170,000 in foreign mutual funds (directly) and ETFs. Therefore, Scott will have to file the FBAR along with a separate Form 8621 for each PFIC.

    • Example 2: David has an investment account worth $900,000 with 9 mutual funds within that investment account with a value of $600,000. In this type of situation, David will have to file the FBAR to report the foreign account, along with Form 8938 to report the foreign account — as well as individual Form 8621s for each PFIC. That is because even though there are mutual funds in the investment account, there are also non PFICs which will mandate the filing of both Form 8938 and 8621.

    • Example 3: Peter has an RRSP that contains multiple foreign mutual funds in it with a value of $400,000. Peter will have to file the FBAR and Form 8938 but may be able to avoid filing Form 8621 for the mutual funds by relying on the treaty exception.

The Tip of the Iceberg

The goal of this article is to help clarify some of the basics of international information reporting. Reporting foreign assets to the U.S. tax authorities can be very complicated, especially when it involves additional items such as foreign life insurance policies, foreign corporations, foreign partnerships, and transactions between U.S. persons and foreign companies. Taxpayers should try to stay in compliance if they are already in compliance or should consider getting into compliance if they have not properly filed the necessary reporting forms if for no other reason than the fact that the IRS has made offshore compliance a key enforcement priority and has been issuing fines and penalties for non-compliance. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.