The requirements for reporting foreign assets can catch many by surprise.
A common scenario – a US Citizen goes abroad to work. He opens a bank account in a foreign country and reports and pays taxes in the foreign country. Maybe he even marries and has children there. He incorporates his business abroad, becoming an officer of the corporation. His small business turns into a multi-million dollar enterprise. Uncle Sam soon becomes a distant relative that he thinks about in passing. If he’s lucky Uncle Sam may send him a letter informing him that he forgot to file his tax return. Or years may pass without being contacted.
Another scenario – a foreigner comes to the US on an immigrant visa. He leaves his bank account active in his foreign country to help pay for his parents’ expenses. His parents pass away and he sells his inherited property, resulting in an enormous windfall. He keeps the funds in his foreign account since he plans to retire there someday. He decides later that he wants to start a foreign partnership with his brother to invest his money in foreign real estate.
Both of these taxpayers may have forgotten that the US taxes its citizens and residents on worldwide income. Both taxpayers would have failed to not only report the foreign income, but also to disclose their foreign assets and interests. Expats who remain US citizens or permanent residents have an obligation to report all foreign income and specified foreign assets. And permanent residents and temporary visa holders who meet the substantial presence test also have the same foreign income and asset reporting requirements. The penalties for failing to do so can be severe.
Reporting Foreign Assets
Individuals with foreign assets or interests may have one or more of the following reporting requirements:
- FinCEN Form 114, also known as FBAR
- Foreign Bank and Financial Accounts Reporting (FBAR). All US persons (which include US Citizens and resident aliens) who have a financial interest or signatory authority over foreign accounts which have an aggregate value of more than $10,000 at any time during the calendar year must report all foreign bank and financial accounts with the Department of Treasury by June 30.
- Form 8938 (FATCA):
- US Citizens, resident aliens, and aliens who meet the substantial presence test must report specified foreign assets on Form 8938 with their Form 1040.
- There is a filing threshhold which varies from $50,000 to $600,000 depending on the filing status of the taxpayer and whether the taxpayer is living in the US or outside the US.
- Form 3520:
- If you are a US Person who receives foreign gifts of money or other property over $100,000 (or $15,601 if received from a foreign corporation or partnership) must report the gift on Form 3520.
- Form 5471 & 5472:
- If you are a US citizen or permanent resident living abroad or a citizen or resident living in the US, you must report your interest in any foreign corporations if you have a specified relationship with the corporation and own or have control over a specified percentage of the total value of the corporation.
- Form 926:
- U.S. persons, domestic corporations or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of property (as described in section 6038B(a)(1)(A) of the Internal Revenue Code) to a foreign corporation.
- Form 8865:
- This form is filed with your US tax return if you own 10% or more of a foreign partnership or foreign flow through LLC. This form shows the income and expense statement of the foreign partnership and the yearly balance sheet. It also reports details of the partnership and your allocable share of the partnerships income. It is similar to Form 1065 which is filed for a US based partnership or LLC.
Penalties for Failing to Report Foreign Assets
The IRS is serious about cracking down on offshore and overseas tax evasion, and the penalties associated with failing to report foreign assets reflect that.
Here are the penalties for failure to report foreign assets:
- FinCEN 114 (FBAR):
- The IRS can impose a $10,000 penalty for each non-willful violation of the FBAR filing requirement.
- Where a person willfully fails to file an FBAR, the IRS may impose a penalty equal to the greater of $100,000 or 50 percent of the account’s highest balance.
- Form 8939:
- If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000. See Treas. Reg. 1.6038A-4(a)(1).
- If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000. See Treas. Reg. 1.6038A-4(d)
- If you underpay your tax as a result of a transaction involving an undisclosed specified foreign financial asset, you may have to pay a penalty equal to 40 percent of that underpayment.
- If you underpay your tax due to fraud, you must pay a penalty of 75 percent of the underpayment due to fraud.
- In addition to the penalties already discussed, if you fail to file Form 8938, fail to report an asset, or have an underpayment of tax, you may be subject to criminal penalties.
- Form 3520:
- The penalty for failure to report a large gift (or bequest) from a foreign person on a timely, complete, and accurate Form 3520 is 5 percent of the amount of such foreign gift (or bequest) for each month for which the failure continues after the due date of the reporting U.S. person’s income tax return (not to exceed 25% of such amount in the aggregate). IRM 188.8.131.52.4
- Form 5471 & 5472:
- The noncompliance penalty adjustment permits the Service, in its sole discretion, to deny deductions and adjust cost of goods sold with respect to the related party transaction(s) based upon information available to the Service. IRC 6038(d)(3).
- Form 926:
- Anyone who fails to any exchanges or transfers of specified foreign properties must pay a penalty equal to 10 percent of the fair market value of the property at the time of the exchange. IRC § 6038B
- Form 8865:
- The initial penalty is $10,000 per failure.
- If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period will apply. The maximum continuation penalty is limited to $50,000 per failure.
- The maximum total penalty under IRC 6679 is $60,000 per failure (an initial penalty maximum of $10,000 plus the continuation penalty maximum of $50,000 per failure).
In addition to the above foreign asset reporting penalties, if a US citizen or permanent resident living abroad fails to file a US tax return, the various return penalties (failure to pay, failure to file, and interest) are applied in combination with the above penalties.
Quick Reference Guide to International Penalties
|Taxpayer||Filing Requirement||Penalty Code Section|
|U.S. person with interest in:||Foreign Corporation (FC)||Form 5471||IRC 6038(b)|
|Foreign Partnership (FP)||Form 8865|
|Foreign Disregarded Entity||Form 8858|
|Penalty reducing Foreign Tax Credit:||Foreign Corporation (FC)||Form 5471||IRC 6038(c)|
|Foreign Partnership (FP)||Form 8865|
|FC or FP with Foreign Disregarded Entity||Form 8858|
|25 percent foreign-owned U.S. corporations||Form 5472||IRC 6038A(d)|
|25 percent foreign-owned U.S. corporations that fail to: 1) authorize the reporting corporation to act as agent of a foreign related party, or 2) substantially comply with a summons for information||Not applicable||IRC 6038A(e)|
|Transferor of certain property to foreign persons:||Foreign Corporation||Form 926||IRC 6038B(c)|
|Foreign Partnership||Form 8865 Schedule O|
|Foreign corporations engaged in U.S. business||Form 5472||IRC 6038C(c)|
|Individuals receiving gifts from foreign persons exceeding $100,000 or $10,000 in the case of a gift from a foreign corporation or foreign partnership (adjusted annually for cost of living)||Form 3520||IRC 6039F(c)|
|Individuals that relinquish their U.S. citizenship or abandon their long-term resident status||Form 8854||IRC 6039G(c)|
|Foreign persons holding direct investments in U.S. real property interests||Not applicable||IRC 6652(f)|
|U.S. person who creates a foreign trust, transfers property to a foreign trust or receives a distribution from a foreign trust||Form 3520||IRC 6677(a)|
|U.S. Owner of a foreign trust||Form 3520-A||IRC 6677(b)|
|Failure to file returns with respect to acquisitions of interests in:||Foreign Corporation||Form 5471 Schedule O||IRC 6679,|
|Foreign Partnership||Form 8865 Schedule P||IRC 6679,|
|IC-DISC, or FSC failure to file returns or supply information:||IC-DISC||Form 1120-IC-DISC||IRC 6686|
|Allocation of Individual Income Tax to Guam or the CMNI||Form 5074||IRC 6688|
|Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession||Form 8898||IRC 6688|
|Taxpayer’s failure to file notice of foreign tax redetermination under IRC 905(c) or IRC 404A(g)(2)||Form 1116 or Form 1118 (attached to Form 1040-X or Form 1120-X)||IRC 6689|
|Taxpayer’s failure to file notice of foreign deferred compensation plan under IRC 404A(g)(2)||Not applicable||IRC 6689|
|Taxpayer’s failure to disclose treaty-based return position||Form 8833 or statement||IRC 6712|
|Failure to Provide Information Concerning Resident Status (Passports and Immigration)||Not applicable||IRC 6039E(c)|
|Taxpayer’s failure to furnish information with respect to specified foreign financial assets||Form 8938||IRC 6038D(d)|
Taxpayers face increasingly burdensome foreign asset reporting requirements, and the penalties seem to get steeper each year. If you’ve been behind on reporting your foreign assets, it can seem to be a daunting and scary endeavor to get yourself complaint. Perhaps equally difficult is finding a tax attorney who is experienced in and understands expat tax issues. Contact us today to see how we can help you become complaint with your foreign asset reporting requirements, even if it has been many years since you’ve filed a US tax return.