Internal Revenue Service has concentrated efforts in recent years to ensure reporting of the existence of foreign holdings, and of income earned abroad or through foreign assets.
Increasing numbers of U.S. taxpayers (U.S. citizen, green card holder, or lawful permanent resident of the U.S, or an entity established within the U.S., or which is owned by U.S. persons, or which conducts business within the United States) have investments in bank and other financial and security accounts in foreign countries. Although it is not illegal to have foreign accounts, the accounts must be disclosed to the IRS on Form 114, Report of Foreign Bank and Financial Accounts (FBAR) and the related income reported on US income tax return. In recent years, the Internal Revenue Service has been aggressively pursuing taxpayers that use undisclosed foreign accounts and foreign entities to avoid or evade tax.
Keep in mind that you may also be required to file new IRS Form 8938, Statement of Specified Foreign Financial Accounts. The Foreign Account Tax Compliance Act (FATCA) of 2010 created separate and distinct reporting requirements for certain taxpayers holding specified foreign financial assets.
Some individuals who failed to timely file FBAR(s) may qualify for streamlined procedures to get back into compliance.
Substantial penalties are assessed for failure to file any of the following applicable forms:
Statement of Specified Foreign Financial Assets – Form 8938
If you meet certain filing thresholds of financial assets held outside of the United States,beginning with the 2011 tax year, you will be required to file a separate Form 8938 for each account or financial asset.
This new form is required in addition to any filing requirements of Treasury Form FinCEN114, and requires substantially more information regarding account values, activity, amount of income earned and where reported, and ownership of the asset.
Report of Foreign Bank and Financial Accounts -Form FinCEN 114
Form FinCEN114 requires electronic reporting of foreign bank and financial accounts, and includes such information as the maximum balance in each account each year. Income from accounts is not reported on this form, but on schedule B of the 1040 tax return.
Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund -Form 8621
A separate form 8621 is required to report the existence of and transactions within foreign based mutual funds, pooled investments or partnerships.
The objective of this form is to include in income any realized and unrealized income earned within foreign based funds.
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts -Form 3520/3520A)
Internal Revenue Service requires that Form 3520 and Form 3520A be filed each year to disclose interests in foreign trusts held by U.S. persons. Annual Information Return of Foreign Trusts must be filed by the 15th day of the 3rd month following the end of the trust’s year end, extensions are available.
For U.S. persons with connections to Canada, the following are considered foreign trusts and Form(s) 3520 and 3520A must be filed annually:
a) Tax Free Savings Accounts (TFSA’s); and
b) Registered Education Savings Plans (RESP’s)
Penalties, if not timely filed, incomplete or incorrect, start at 5% of the trust value or $10,000 (whichever is greater)
Information Return of U.S. Persons With Respect to Certain Foreign Corporations -Form 5471
If you own more than 10% of a foreign corporation, acquire or dispose of shares of a foreign corporation so that your holdings fall above or below 10%, or if the foreign corporation is considered a “Controlled Foreign Corporation”, your proportion of certain types of earnings of the corporation are included in your personal income tax return. This inclusion under subpart f of the Internal Revenue Code is made regardless of whether any income has actually been paid to you.
Options for U.S. Taxpayers to Disclose Foreign Financial Assets
Effective July 1, 2014, the IRS announced it has expanded the Streamlined Filing Compliance Procedures for non-resident, non-filer taxpayers to include taxpayers who reside in the United States.
There are 4 new options available for U.S taxpayers to become compliant with their past tax and international information reporting regarding foreign financial assets:
1. Offshore Voluntary Disclosed Program
2. Streamlined Filing Compliance Procedures
a. Streamlined Foreign Offshore Procedure – For U.S. citizens or permanent residents who live outside the United States.
b. Streamlined Domestic Offshore Procedure – For U.S. citizens or permanent residents who reside within the United States.
3. Delinquent Report of Foreign Bank and Financial Accounts Submission Procedures
4. Delinquent International Information Return Submission Procedures