Foreign Considerations, FBAR and FATCA

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1 Foreign Considerations, FBAR and FATCA

2 Today s Topic Overview of potential federal foreign filing situations that can leave your client open to IRS penalties and never ending statute of limitations American Expat Tax Services

3 IRS Foreign Initiatives Since the first OVDP opened in 2009 the IRS has collected over $10 billion dollars from taxpayers with offshore assets International compliance remains a large part of the IRS Priority Guide American Expat Tax Services

4 Types of Reporting Income Tax Forms Forms that fulfill the requirement to compute and pay taxes imposed under Title 26-Internal Revenue Code of the US Code Information Disclosure Forms Forms that fulfill the obligations to report certain types of information under Title 26 or Title 31-Money & Finance. American Expat Tax Services

5 Income Tax Forms American Expat Tax Services

6 Form Closer Connections Usually filed by snowbirds who have met the substantial presence test and wish to remain non-resident for US tax purposes This form can only be used when the individuals have less than 183 days if presence in the US during the current year and their tax home is outside the US. Election is made on a yearly basis and can be changed year to year Remaining a US tax non-resident every year may not be the most beneficial choice and the options should be discussed each year. Filing as a US tax resident will invoke the requirement to file FBAR and all other informational forms required of US persons American Expat Tax Services

7 Tax Treaty Non-Residency Individuals who otherwise qualify for Closer Connections but have 183 days or more in the US, but wish to be treated as a US nonresident alien for tax purposes. If they meet the definition of a resident of their home country under the residency tie-breaker rules found in the tax treaty, they can file Form 8833-Treaty Based Disclosure and file as a non-resident. Non-resident treatment under the tax treaty does not absolve the person from having to file FinCEN Report 114, if they meet the filing threshold. American Expat Tax Services

8 Form Statement of Exempt Individuals This form is required to be filed by individuals and their family members who are present in the US on F, J, M, or Q visas as students, teachers, or trainees. This form does not exempt the person from paying US taxes, but exempts their days in the US from counting towards the substantial presence test- which keeps them as US non-resident alien, taxable only on US source income. American Expat Tax Services

9 Misconceptions for US Taxpayers with Offshore Assets If the income isn t from the US it isn t taxable If the income is less than the maximum amount excludable under Section 911 (FEIE) Of the income is exempt under the tax treaty it doesn t have to be reported If the person doesn t owe taxes they don t have to file If the person has zero income they don t have to file US persons can file Form 1040-NR and pay tax only on US source income if they live outside the US US persons can claim all the treaty benefits available to non-residents because they are US non-residents American Expat Tax Services

10 Tax Forms Often US persons whose income is all foreign will not have to pay any additional taxes to the IRS, due to the offset of US taxes using foreign tax credits and foreign earned income exclusion, but they are still required to complete the tax forms. If the person meets any of the requirements to file a US return- the fact that they will not owe money is moot- the forms must be completed and any deductions, credits, or treaty benefits must be declared on the proper forms to be allowed. SOL-if a person has more than $5000 of unreported for an income than the Internal Revenue Service has the right to go back six (6) years American Expat Tax Services

11 Hidden Reporting Sometimes information forms are part of the tax return, and sometimes they are not. The penalty assessments for missing or incomplete information filings are extremely harsh. SOL is tolled American Expat Tax Services

12 Information Disclosure Forms Information forms do not generally calculate any tax, they instead provide specific information to the IRS or Treasury Department for a specific reason. These forms are looking for data to identify tax evaders as well as criminals who are involved in terrorism, illegal drugs, money laundering and financial fraud. These forms are generally filed to let the IRS know when a relationship exists between a US person and foreign business or other foreign entity, or when a US person has received a sizable gift or inheritance from a nonresident alien. American Expat Tax Services

13 Information Form Penalties The penalties for not timely filing this type of form start at $10,000 USD- many penalties are automatically assessed. Some information forms are filed separate from Form 1040, and others are filed as part of the tax return. American Expat Tax Services

14 How is the IRS finding our clients? Foreign Bank Account Reporting (FBAR) Foreign Account Tax Compliance Act ( FATCA) Cross referencing forms in other tax returns American Expat Tax Services

15 FBAR-Foreign Bank Account Reporting American Expat Tax Services

16 Foreign Bank Account Reporting- FBAR The Report of Foreign Bank and Financial Accounts commonly known as FBAR - has its roots in the Bank Secrecy Act passed by Congress in This Act falls in the jurisdiction of the US Treasury Department and was passed primarily as a tool for law enforcement. USC TITLE 31 It requires reports to be filed and records to be kept regarding the ownership and control of foreign financial accounts, which are used by the US Government in its investigations of drug smugglers, money launderers, and tax evaders. American Expat Tax Services

17 Foreign Bank Account Reporting- FBAR FinCEN Form An information only annual report that lists a U.S. Person s financial interest in and/or signature authority over foreign financial account(s). Administered by the IRS Not a tax form The fact that a U.S. tax return is not filed or required is of no relevance to the mandatory obligation of U.S. persons to disclose their monies and property held in foreign countries. Some 1040-NR filers are required to file FBAR American Expat Tax Services

18 FBAR, F1040-NR & the Tax Treaty All US law is found in the US Code (USC). US Code Title 26 is Income Tax US Code Title 31 is Money & Finance FBAR is found under Title 31 The tax treaty only changes things in regard to income taxes (USC Title 26), not monetary reporting policy (USC Title 31). The taxpayer remains a resident of the US for all purposes other than income tax when the tax treaty residency rules are invoked. American Expat Tax Services

19 FinCEN Form 114- Foreign Bank Account Reporting Provides the location and account information of monies and certain monetary assets a US person has outside the US. This includes all accounts, any time there is a financial interest in, or signature authority over the funds located outside the US American Expat Tax Services

20 Report 114 Report 114 (FBAR) must be electronically filed on the FinCEN BSA website or via an IRS approved software Due Date NEW!!!!!- April 15 with an extension until October available June 15 for persons outside the US First time filer penalty relief American Expat Tax Services

21 FBAR- Statute of Limitations The statute of limitations is: Filing- 6 years, whether or not the form was filed Record Keeping 6 years from the date the IRS asks A US citizen living in Toronto- the highest total of her bank and retirement accounts in local banks during 2010 was $20,000 USD. Her FBAR report for 2010 would have been due on June 30, She was busy and never got around to filing hers. The statute of limitations will expire on June 30, 2017, and the IRS would no longer be able to assess penalties for failure to file. On March 1, 2013 when the IRS realized that she had not submitted her 2010 FBAR, they asked for records showing the accounts. The IRS has until February 28, 2019 to assess record keeping penalties. American Expat Tax Services

22 Who has to file FBAR? Must be a US person A citizen of the United States - whether by birth or naturalization U.S. Residents/Green card holders - expired or current Individuals who meet the substantial presence test - even if for tax purposes they file as a non-resident based on the treaty tie-breaker rules A non-us citizen who makes the first year election to file as a US tax resident Who has one or more financial account(s) The financial account(s) is in a foreign country The US person has either a financial interest in or other authority over the foreign financial account, and The aggregate sum of the highest amounts(s) in the account(s) valued in US dollars exceed$10,000 at any time during the calendar year American Expat Tax Services

23 If in doubt declare the account! American Expat Tax Services

24 FBAR Penalties Non-willful late filing - $10,000 per year Willful non-filing the greater of 50% of account high balance or $100,000 per account- per person- per year There can be multiple penalty assessments arising from a single foreign account when more than one year is unfiled, or there are multiple owners of the account. Each person can be liable for the entire penalty. Both civil and criminal penalties may be imposed on the same violation. Government has the burden to show willfulness American Expat Tax Services

25 Collection of Penalties Once the IRS has assessed a monetary penalty, it has 2 years in which to file a civil suit to recover the FBAR penalty and unlimited years in which to obtain payment through offsetting payments. The government can attach garnishes to wages or social security, or employ debt collection firms. American Expat Tax Services

26 FATCA- Son of FBAR American Expat Tax Services

27 Foreign Account Tax Compliance Act Came into law in March 2010 IRS version of FBAR- targets tax non-compliance of US taxpayers with foreign accounts and assets Form 8938 is included with tax return 2 prong approach: Self reporting of the taxpayers on Form 8938 (since 2012) Foreign financial institutions reporting on foreign accounts held by US taxpayers and foreign entities in which US taxpayers have interests Currently only individuals need to report on F8938 American Expat Tax Services

28 FATCA- Filing Thresholds Higher reporting thresholds than FBAR based on whether the taxpayer lives inside or outside the US Living in the US $50,001 EOY or $75,001 at any time during the year ($100,001 /$150,001 for MFJ) Living Outside the US $200,001 EOY or $300,001 at any time during the year ($400,001/ $600,001 for MFS) Broader scope than FBAR includes foreign accounts and assets outside of financial accounts American Expat Tax Services

29 F8938- FATCA Not Reportable Cash Foreign Real Estate Tangible assets held for investment (art, jewelry, antiques, etc) Directly held precious metals Foreign social security Reportable Foreign stocks held outside of brokerage acct Contract to sell assets held for investment Interest in foreign estate Interest in foreign pension/dcp American Expat Tax Services

30 FATCA With the implementation of FATCA, Foreign Account Tax Compliance Act, the importance of IRS compliance is more important than ever. American Expat Tax Services

31 Penalty for Failure to File $10,000 failure to file Increases up to $50,000 for continuing failure after IRS request If a tax return is not otherwise required- F8938 does not need to be filed Presumption of ownership Presumption of maximum value Reasonable cause exception available Failure to file tolls SOL American Expat Tax Services

32 Other Foreign Forms American Expat Tax Services

33 Form 926- Return by a U.S. Transferor of Property to a Foreign Corporation Americans who transfer money or property to a foreign corporation may be required to file Form 926, especially if the transfer was made in exchange for ownership of 10% or more of the stock of the foreign corporation or if the amount or value exceeds $100,000 during a 12 month period. Penalty- 6662j, the penalty equals 10% of the fair market value of the property at the time of the transfer. Waiver available for reasonable cause The penalty is limited to $100,000 unless the failure to comply was due to intentional disregard. American Expat Tax Services

34 Forms 3520-A & 3520 Forms 3520-Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts & 3520-A- Annual Information Return of Foreign Trust with a US Owner Annual forms filed by the US owner or beneficiary of a non-us trust account to report their ownership or transactions with the trust. These include trusts in the traditional sense, but also most foreign retirement accounts, deferred profit sharing plans, and foreign education savings plans American Expat Tax Services

35 Form 3520-A Form 3520-A is filed by the trustee to report the annual transactions and financials of the trust. Filed separate from the tax return When the foreign trustee does not complete and submit the formthe burden shifts to the person considered to own the account under Internal Revenue Code The form is due by March 15 each year and carries a $10,000 USD fine for not filing on time. 6677, 6039F, 6662j Criminal penalties 7203, 7206, 7207 American Expat Tax Services

36 Form 3520 Form 3520 is filed by any US person that transfers money into a foreign trust, owns any part of a foreign trust, receives money from a foreign trust or inherits or receives as a gift, greater than $100,000 US from a non US person or estate. Reporting an inheritance, gift or distribution does not necessarily make it taxable. Filed separate from the tax return Due on same date as personal tax return However, not reporting these can result in fines of $10,000 and/or a percentage of the transaction. 6677, 6039F, 6662j American Expat Tax Services

37 Form Information Return of U.S. Persons With Respect to Certain Foreign Corporations Form 5471 is used to report ownership of and transactions with foreign corporations by US persons. Part of tax return Ownership is allocated to the US person based on different sets of constructive ownership rules. This form is part of the 1040 tax return. $10,000 penalties are automatically levied for failure to file, or late filing. (max $50,000 for refusal after request) 6038b, 6038c, 6679, 6662j 7203, 7206, 7207 American Expat Tax Services

38 Form 5472-Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business Form 5472 reports when a non-us person owns 25% or more of a US corporation, a foreign corporation is doing business in the US, or when there has been a reportable transaction between a US corporation and a foreign shareholder. Separate forms are filed for each foreign shareholder. Form 5472 is filed as part of the corporation s tax return and carries an automatic $10,000 penalty for failure to file. 6038A, 7203, 7206, 7207 American Expat Tax Services

39 Form 8865-Return of U.S. Persons With Respect to Certain Foreign Partnerships When a US person has certain levels of ownership in or transactions with foreign partnerships, they are required to file Form 8865 annually. It is filed as part of the tax return This form is very similar to Form 5471 in content and penalty assessments. 6038b, 6038c 7203, 7206, 7207 American Expat Tax Services

40 Form PFIC Reporting Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund Mandatory for direct or indirect shareholders of a passive foreign investment company when they receive any distributions, dispose of, have made a QEF or M2M election, or meet the ownership threshold of $25K (direct)/$5k (indirect) Most common PFICs- non-us mutual funds, many ishares/etfs IRC No penalty yet American Expat Tax Services

41 Note about Penalties Most penalties can be waived if reasonable cause can be demonstrated by the taxpayer. This can only work once for your client. Once they have had a penalty waived, they need to be extremely diligent to make sure all future filings are on time. There is no statute of limitation for the non-filing or incomplete filing of these forms (other than Report 114- FBAR), which means that the IRS can impose penalties as far back as it wishes. There are programs & protocols available currently that either waive or reduce penalties for people who wish to come forward and get into compliance voluntarily. American Expat Tax Services

42 1040-NR & ITIN Notes The IRS has been matching 1042-S forms to verify withholding before releasing refunds- major delays Any ITINs not used on a US tax return in the last 3 years is no longer valid as of Jan ITINs with middle digits of 78 or 79 MUST be renewed even if used on a return in prior 3 years TPs must file a renewal Families can renew together ITINs used solely for information reporting such as 1099/1042-S do not need to renew PATH Act, Notice American Expat Tax Services

43 Summary The US imposes income tax on the world income of its citizens and those considered to be tax residents; The US subjects US tax residents and sometimes non-residents to an onerous amount of information filings to seek out tax evaders, terrorists and criminals; The implementation of FATCA, Foreign Account Tax Compliance Act, will uncover many more people who need to file US returns. American Expat Tax Services

44 Contact Info Mary Beth Lougen EA USTCP x301 American Expat Tax Services