A Beginner’s Guide for Expats with Foreign Accounts or Assets

An Expat Taxes Guide for Beginners: Overseas Account Filing

Expat Taxes Guide for Beginners

The United States is one of the few countries that requires U.S. Taxpayers across the globe to report their worldwide income and disclose their overseas accounts, assets, and investments. Thus, even U.S. citizens who live outside of the United States and earn all of their income from foreign sources are still required to report this income on their U.S. tax return each year. Likewise, taxpayers who are considered U.S. persons are also required to report their foreign accounts, assets, and investments each year to the IRS on several different international information reporting forms, such as FBAR and FATCA Form 8938. The extent to which the taxpayer must report their foreign accounts and assets will depend on the type of investment and the total value of their overseas accounts and assets. In general, once expats get a good grasp on what their reporting requirements are — and get back into compliance if they are already out of compliance for prior years’ non-reporting — the annual disclosure is manageable. Let’s walk through some of the very basics of overseas account and asset filing:

Which Expats File U.S. Taxes and Report Overseas Assets

Any expat considered a U.S. person for tax purposes must file their US taxes and report their foreign accounts and assets. Typically, there will be 3 categories of individuals who qualify as having to follow U.S. tax return as an expat:

• • • U.S. Citizen

    • Lawful Permanent Resident

    • Foreign National Who Meets the Substantial Presence Test

What Types of Assets are Reportable

The IRS has significantly increased enforcement of foreign accounts compliance-related matters. That is because the U.S. Government believes many U.S. persons are hiding accounts and assets offshore and income generated from these assets. If the IRS does not know that the assets exist, they cannot trace them. And, if Taxpayers are not reporting their income, then they are not paying tax on the income – and the international tax gap continues to expand. Many different types of foreign accounts are reportable, beyond the standard bank account. Some of these account types include foreign:

• • • Stock Accounts

    • Mutual Fund Accounts

    • Trust Accounts

    • Life Insurance Policies

    • Pension Plans

    • Annuities

In recent years, the U.S. government has entered into FATCA (Foreign Account Tax Compliance Act) Agreements with over 110 countries, in which these foreign countries report U.S. account holders to the IRS and has helped the U.S. close the tax gap. Let’s walk through the basis of foreign account reporting, and specifically what types of accounts are reportable (and which international reporting forms are used to report the accounts).

Foreign Bank Accounts

Bob is a US person who has foreign bank accounts in several foreign countries, with the total value of the foreign bank accounts at around $300,000. Several of the accounts have less than $10,000 and are dormant and/or inactive. In this type of situation, since the total value of foreign accounts exceeds $10,000 for the year, all the accounts are reportable on the FBAR — even if they are below $10,000 and even if they are dormant.

Foreign Investment Accounts

Linda is a permanent resident who previously lived in a foreign country and still maintains many of her overseas accounts. The accounts are not bank accounts but rather investment accounts similar to a Vanguard or E*TRADE account in the United States. The assets are not taxable in the foreign country, and the accounts are comprised primarily of stock and mutual funds. In this type of situation, Linda must report the foreign investment accounts on her annual FBAR. Since the stock and mutual funds are in accounts, she does not typically have to parse out each stock/fund but instead, she can gross up the value of the accounts for FBAR purposes. She may have a separate requirement for reporting the individual foreign funds as well.

Foreign Stock Certificates

Louise has ownership of various foreign stock certificates. The stock certificates are not located in foreign accounts. Instead, she inherited them several years ago and in total, she has ownership of nine different stocks worth $2 million. Louise does not have to report the foreign stock certificates on the FBAR, because she owns the stock certificates individually and they are not located in a foreign account. Louise would still have to report the certificates for FATCA on Form 8938.

Foreign Pension Plans

Tina is a US citizen who worked in various countries in her lifetime. She has retirement plans in the United Kingdom (SIPP), Singapore (CPF), and Australia (Superannuation). Since the foreign pension plans are considered accounts, they are included in the annual FBAR. This is distinct from the rule that if a person has an IRA or 401(k) in the United States that holds foreign accounts in it, those foreign accounts are generally not parsed out and reported on the FBAR. But, foreign pension plans are generally included on the annual FBAR. The US Tax treatment of these accounts will vary.

Foreign Mutual Funds

Gene is an astute investor. When the market was down, he acquired various foreign ETFs and foreign mutual funds in different countries and those funds have increased in value significantly. Gene holds the funds in a single investment account. For FBAR purposes, Gene will report the account with the total different funds. But, since the total value of the funds exceeds $25,000 (Gene is still single), he will most likely have to parse out the different funds on individual form 8621s when filing his tax returns. Remember, the FBAR is a separate form from your tax return. And, since some of these funds issued large dividends for the first time this year (and he was not properly advised to make an MTM or QEF election in prior years), he may have a very complicated tax return in the coming year.

Which Forms are they Reported on and What are the Due Dates?

Let’s take a brief look at some of the more common international information reporting forms, along with the due dates for them to be filed.

FBAR  

The FBAR is used to report foreign bank and financial accounts to the US Government. The Form is due on April 15 but is currently on automatic extension. Therefore, if you did not file the FBAR (FinCEN Form 114) by April 15, you still have until October to file it. And, you do not have to file an extension form such as Form 4868 or 7004 to obtain the FBAR extension — because the extension is automatically granted.

Form 8938  

Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then the Form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.

Form 3520  

Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.

Form 3520-A 

Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). In order to extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.

Form 5471 

Form 5471 is used to report the ownership of certain foreign corporations. The filing date is the same as when a person’s tax return is due — and if the taxpayer files an extension for the underlying tax return, Form 5471 will go on extension as well. In recent years, Form 5471 has become infinitely more complex — so taxpayers should be cognizant of the different filing requirements and plan accordingly.

How to Apply for An Extension

When a Taxpayer anticipates that they may have to file a form after the due date, they should consider filing for an extension before the date the filing is due. Not all forms require the same protocols and procedures for filing for an extension for for example, currently, the FBAR is on automatic extension through October. To file an extension for forms such as form 3520 or 8938, the taxpayer simply follows an extension to file their regular tax return and these international reporting forms go on extension as well. For For, 3520-A, the taxpayer has to file a specific extension form 7004 and follow the necessary instructions for US owners of foreign trusts who are seeking to.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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.