Do you have a bank account, investment or security assets in a foreign country? Do you know by law every US Person (US Citizen, US permanent resident and US Company(Corporation, Partnership, Estate, Trust) established within US) must report bank accounts, investments and securities in other words any type of financial account in a foreign bank to IRS? Are you worried about your IRS reporting obligation? We know that keeping track of all the tax laws, particularly if you have foreign bank accounts, investments or securities can be extremely hard. A slight miss or overlooked aspect could lead to heavy fines! There are a number of US citizens, permanent residents and companies who are liable for foreign reporting and tax.
Having a foreign account is permitted under US law. However, the problem arises when US citizens, permanent residents and companies conceal foreign banks, investment and security accounts and hide their international earnings in order to evade tax or reporting. This is illegal, as the IRS needs to be notified of every foreign account on the Report of Foreign Bank and Financial Accounts, FBAR, also known as Form 114.
Submitting your foreign income details to the tax return department allows you to deal with foreign accounts and payments in a legal and judicious manner. People who do not follow these rules come under aggressive scrutiny by the Internal Revenue Service, which is involved in identifying and taking legal action against US citizens, permanent residents and companies with unofficial foreign accounts and foreign dealing with evasion of tax payment.
This brings us to another important part of form submission which involves Form 8938, The Statement of Specified Foreign Financial Accounts. You may be required to file this form with the IRS also. Furthermore, certain taxpayers, particularly those with special foreign financial assets have different reporting and filing requirements as per the Compliance Act of 2010 (FATCA).
Although there are sizable penalties for the failure of submission of any foreign accounts form, there are certain occasions and individuals who can qualify for easy procedures, even after failing to file the appropriate FBAR within the allocated time, to get back within the lawful tax-paying circle.
You need to submit the following forms timely and can be liable to penalties if you fail to do so. Penalties start at 5% of the trust value or about $10,000, liable under circumstances of untimely filed, incorrectly filed or incompletely filed forms.
Form 8938: Statement of Specified Foreign Financial assets
You need to submit the form 8938 if, starting from the tax year 2011, you qualify for certain filing thresholds of financial assets outside the US. You will need to file this form for every foreign account and/or financial asset that you have.
The form requires extensive details about the account values, the amount of income, activities, ownership, and is significantly different and detailed as compared to the treasury form: FinCEN114.
Form FinCEN114: Report of foreign bank and financial accounts
This is a digital report of the summary of your foreign bank account. It involves reporting details like the maximum balance of the account in a year. The income details, however, are not required and are submitted in the 1040 tax return, schedule B.
Form 8621: information return by a shareholder of a passive foreign
investment company or Qualified Electing Fund
Foreign partnerships, investments and mutual funds need to be reported on a different form known as form 8621. The form recognizes all the income in foreign-based funds and includes it in the tax payment calculation.
Form 3520/3520A: Annual Return to Report Transactions with Foreign Trusts and Receipts of Certain Foreign Gifts
Us citizens having dealings or interest in foreign trusts are required by the Internal Revenue Service to file form 3520 and 3520A accordingly. The form should be submitted by the 15th of the 3rd month after the Trust’s year end. Different extensions are also available.
The tax-free savings account and registered education savings plan form are considered as foreign trusts in Canada that are applicable for registration. You need to file form 3520 and 3520A if you are a US citizen with these Canadian connections.
Form 5471: Information Return of US Persons with Respect to Certain Foreign Corporations
This form becomes applicable under the following conditions:
- If you own more than 10% of a foreign company or foreign corporation
- I you have ownership of or you sell shares worth more or less than 10% of a foreign corporation or company
- If the foreign corporation, in turn, is considered a ‘controlled foreign Corporation’.
In these circumstances, your earnings have to be included in your tax returns. The criteria for tax inclusion is considered applicable under the internal revenue code, regardless of actual payment to you.
Other Options for Disclosing Financial Assets
There are 4 additional options that US taxpayers can avail when disclosing their financial assets to comply with US tax regulations. Effective since July 1st, 2014, nonresident and non-filer taxpayers have been expanded by the IRS to include US resident taxpayers also. The additional options that are available include:
- Program Offshore voluntary disclosed
- Streamlined foreign offshore procedure
- Streamlined domestic offshore procedure
- Streamlined filing compliance
- Delinquent report of foreign banks and financial account procedures
- Delinquent International information returns submission procedures
Also read Foreign Tax Credit: An Insight Guide