If you have lived in the U.S. for a while, you must be aware that you are taxed on worldwide income unless you are considered a nonresident alien who meet neither the green card test or the substantial presence test. How about your foreign assets? I will give you some general guidance on the questions below: Do you need to report it? What do you need to report? And how to report?
In general, there are three common reporting requirements for foreign assets owned by a U.S. person including U.S. citizens, resident aliens and domestic entities. Take a look at the chart below. I made some comparison and summary. I focus on individuals living in the U.S only not in consideration of all special treatments, exceptions or exemptions. It is just general guidance not legal or tax advice.
Regulations
The Bank Secrecy Act. Report of Foreign Bank and Financial Accounts (FBAR)
The Foreign Account Tax Compliance Act (FATCA)
IRS Regulation. Passive Foreign Investment Company (PFIC)
Who need to file?
U.S. persons who have foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year. If you have 2 accounts with a combined account balance greater than $10,000 at any one time, both accounts would have to be reported.
U.S. citizens, resident aliens and certain nonresident aliens whose total value of specified foreign financial assets was more than $50,000 (for individual or married filing separately) / $100,000 (for married filing jointly) on the last day of the tax year, or more than $75,000 / $150,000 at any time during the tax year.
U.S. persons who are a direct or indirect shareholder of a PFIC under certain circumstances here (To be safe, most of the foreign mutual funds, hedge funds, and other investments generating passive income like interests and dividends should be treated as PFICs).
Some exceptions and de minims rule may apply.
What to report?
The maximum value of all foreign financial accounts including cash value life insurance and annuities.
The maximum value and associated income of all foreign financial accounts. You also need to report some foreign private investment assets like hedge funds, private equity funds, Private stocks and partnership interests.
It requires a lot of information depending on different elections you made on the form. You could learn more about the details from the Instructions for Form 8621.
What not to report?
You do not need to report foreign private investment assets like hedge funds, private equity funds, and directly owned real estate.
You do not need to report directly owned foreign real estates.
Non PFICs.
Where to file?
Not file with your federal income tax return and must be filed electronically through FinCEN’s BSA E-Filing System.
File with your federal income tax return. You are exempt from filing Form 8938 if you do not need to file the income tax return this tax year.
File with your federal income tax return. Mail the form to IRS directly if you do not need to file the income tax return this tax year.
When due?
April 15 of the year following the calendar year being reported with a maximum 6 months automatic extension to October 15 each year.
Due on the date of your income tax return including any applicable extensions.
Due on the date of your income tax return including any applicable extensions.
Penalties
For penalties that are assessed after August 1, 2016, whose associated violations occurred after November 2, 2015, the IRS may assess an inflation-adjusted civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the inflation-adjusted penalty may be the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each violation.
If you must file Form 8938 and do not do so, you may be subject to penalties: a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.
There are no explicit penalties for failure to file Form 8621. However, the penalties may apply if you also fail to file Form 8938 properly. Also, failure to file Form 8621 will result in suspension of the statute of limitation on your tax return. In other words, your door is now open for an IRS audit indefinitely.
If you have a certain level of control in a foreign corporation or partnership, in addition to filing Form 8938, you may also need to file Form 5471 for corporations or Form 8865 for partnerships. The details are beyond the scope of this post.
FBAR and FATCA requirements are fairly straightforward and could be met easily by following the instructions directly from FinCEN and IRS. IRS also has a detailed Comparison of Form 8938 and FBAR Requirements on their website.
Form 8621 (PFIC) is extremely complicated. Sometimes you may even need to find a tax attorney who specializes in this rather than a CPA to help you figure out what works best for you. It is also one of the strong reasons that I usually recommend my clients to invest in the U.S. directly instead of in foreign countries. The cost of reporting and potential tax liabilities may outweigh the possible extra returns you receive from foreign investment accounts.
Again, I am just offering some general guidance here. The information provided in this post should not be taken as the sole rule of action. It is advised that you consult with a CPA or a tax attorney for your specific situation. You could learn more about “What should you know before getting a professional to help you manage your personal finances?” from my previous blog post.
Enjoy reading my blog? Sign up at the bottom to effortlessly stay on top of my blog posts and news for free!
Need help? Email us or Schedule a call today!