Foreign Financial Asset Reporting (for U.S. Citizens and Green Card Holders) Dale Mason, CPA International Tax Director The Wolf Group P.C. The Wolf Group, PC Fairfax, VA Washington, DC New York, NY (703) 502-9500
Disclaimer Any U.S. tax issues addressed in the body of this presentation is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. The U.S. tax law is very complex, please seek professional tax assistance based on your specific situation.
Agenda FinCen Form 114 - Foreign Bank Account Report Form 8938 - Specified Foreign Financial Asset Report Form 8621 - Passive Foreign Investment Companies Form 3520/3520-A Foreign Trusts & Gifts/Bequests from Nonresidents FATCA Foreign Account Tax Compliance Act IRS Amnesty OVDP/Streamlined Procedures
FinCen 114 ( FBAR ) Foreign Bank Account Report Required under the Bank Secrecy Act of 1970 Congress was concerned U.S. persons were using foreign financial institutions to hide illegal activity and evade tax Information may be shared with law enforcement Not a tax form, but IRS involved in enforcement Must be received by June 30 th, no extensions For the 2016 FBAR, due date will change to April 15, 2017
FBAR - Who Must File? A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. U.S. persons are U.S. citizens and GCH but not person who are tax residents because of an election under 6013(g)
FBAR - Foreign Financial Bank Account Account Checking, savings, time deposits, CDs Securities Account Stocks, bonds, mutual funds, etc. Other Financial Account Annuity or insurance policy with a cash surrender value NOT individual stocks or bonds Held outside the U.S. and Territories
Financial Interest Owner of Record or Holder of Legal Title Regardless of whether account is maintained for benefit of another Don t need a personal beneficial interest POA, nominee, agent Constructive/Indirect Ownership Account owned by agent, nominee, etc. > 50% owner of corporation > 50% owner of a partnership > 50% present beneficial interest in a trust
Signature Authority Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication - whether in writing or otherwise) to the bank or other financial institution that maintains the financial account
Maximum Value Must file if aggregate of all foreign financial accounts maximum values on any day during the year exceeds $10,000 Look first at the maximum value of each individual account Then aggregate all maximum values and compare to $10,000 Convert foreign currencies at the 12/31 exchange rate using Treasury Department rates: http://www.irs.gov/businesses/small-businesses-&-self- Employed/Treasury-Department-End-of-Year-Exchange- Rates
FBAR E-Filing Issues FinCEN 114 Mandatory e-filing For current and amended prior years Third-party authorization FinCEN Form 114a, Record of Authorization to Electronically File FBARs Required to file joint FBAR or for CPA to file for client Kept on file (by both parties), not sent to FinCEN
FBAR Penalties Civil Penalties Non-willful: up to $10,000 per violation Willful: up to the greater of $100,000 or 50% of the account balance per violation Reasonable cause exception
Form 8938 Specified Foreign Financial Asset Report The Wolf Group, PC Fairfax, VA Washington, DC New York, NY (703) 502-9500
Form 8938 Background Intent is to deter use of tax havens to evade tax through increased disclosure requirements and penalties Requires certain U.S. taxpayers holding specified foreign financial assets exceeding $50,000 to report them on Form 8938 Requirement for tax years starting after 1/01/2011
8938 - Specified Person Specified Individuals U.S. Citizens Green Card Holders (Usually Other U.S. tax resident NRA electing to be taxed as a resident under 6013(g) or (h)
8938 - Specified Foreign Financial Asset Any of the following held for investment outside a foreign account: Any stock or security issued by a non-u.s. person Any financial instrument or contract that has a non-u.s. issuer or counterparty Any interest in a foreign entity Foreign social security is NOT a SFFA
Form 8938 IDB Pension Amended tax returns required back to tax year 2011! The IDB pension has been determined to be a specified foreign financial asset There is no statute of limitations for the Form 8938 and the return is open for inspection by the IRS unless 8938 is filed (if required to be filed) The IDB defined benefit plan does not have an ascertainable value, therefore the gross amount of the pension received each year should be reported on the Form 8938 The Wolf Group can assist with the preparation of amended tax returns
8938 - Filing Thresholds Year-End Aggregate Value of All Specified Foreign Financial Assets Exceeds: Highest Annual Balance Exceeds: Single, living in the U.S. $50,000 $75,000 Single, living outside the $200,000 $300,000 U.S. MFS, living in the U.S. $50,000 $75,000 MFS, living outside the U.S. $200,000 $300,000 MFJ, living in the U.S. $100,000 $150,000 MFJ, living outside the U.S. $400,000 $600,000
8938 - Valuation Accounts: may rely on periodic statements Other assets: may rely on year-end value, don t need appraisal Foreign estate/pension/deferred comp year-end value If not known, year-end FMV of distributions received during the year If no distributions received, zero Presumption that value of SFFAs exceeds filing threshold unless taxpayer can show otherwise Convert to USD at year-end spot rate http://www.irs.gov/businesses/small-businesses-&-self- Employed/Treasury-Department-End-of-Year-Exchange-Rates Even if sold/closed during the year
8938 Penalties $10,000 penalty for failing to file Form 8938 Additional $10,000 penalty for each 30-day period following notification by Treasury (after 90 days), up to $50,000 additional 40% underpayment penalty for unreported income related to undisclosed specified foreign financial assets 75% for fraud Criminal penalties Reasonable cause exception Each spouse liable on joint returns
Statute of Limitations If a taxpayer fails to file Form 8938 or fails to report a specified foreign financial asset, the statute of limitations for the tax return does not start to run Statute remains open until 3 years after complete 8938 is filed This is why the IDB pension may have to be reported on an amended tax return back to 2011
FBAR vs. 8938 FBAR (FinCEN 114) Form 8938 Who Must File U.S. Persons Specified Persons What is Reported? Foreign financial accounts SFFAs Signature Authority? Yes No Filing Threshold $10,000 $50,000 - $600,000 Maximum Civil Penalties Up to $100,000 or 50% Up to $60,000 Where to File BSA e-filing system With tax return Due Date 6/30, no extensions 4/15, plus extensions Statute of Limitations 6 years from filing date 3 years from filing date http://www.irs.gov/businesses/comparison-of-form-8938-and- FBAR-Requirements
Form 8621 PASSIVE FOREIGN INVESTMENT COMPANIES The Wolf Group, PC Fairfax, VA Washington, DC New York, NY (703) 502-9500
8621 - History Favorite scheme of U.S. investors before the PFIC rules: Invest in offshore mutual fund Defer tax Redemption of stock in the fund and. Capital gain treatment!
8621 - What is a PFIC? Good Example: Foreign Mutual Fund/Investment Fund 75% or more of its gross income for the taxable year is passive 50% or more of its assets are held for the production of passive income Passive Income Includes: Interest, Dividends, Rents, Royalties Capital Gains from the sale of passive assets Exception for foreign corporations actively involved in the insurance or banking business
3 Options for U.S. PFIC Investors Qualifying Electing Fund ( QEF ) Election Mark-to-Market Election Default: Excess Distribution Regime Applies
Qualifying Electing Fund ( QEF ) If PFIC provides all the necessary information then the investor may make a QEF Election QEF Election allows U.S. investor to report his/her prorata share of: Ordinary Earnings (interest, dividends) Net Long-Term Capital Gains Election must be made in first year that U.S. investor holds the PFIC shares
Mark- To-Market Election PFIC must be listed on a national securities exchange that is registered with the SEC or a foreign securities exchange that is regulated by a foreign government. U.S. investor recognizes income equivalent to the appreciation of the stock FMV at 12/31 less adjusted basis of stock Income is recognized as ordinary income
Excess Distribution Regime Worst case scenario Designed to prevent the accumulation of passive income in a foreign corporation. No current income recognition if no distributions (compare with CFC rules)
Excess Distribution Regime Cont. Tax liability arises when an actual distribution is made by a PFIC or when stock sold. An interest charge is imposed on any portion of a distribution that represents deferred income.
Excess Distribution Regime Cont. Excess Distribution taxation Excess distributions allocated to current year are treated as ordinary income ocalculate excess distributions using the spot rate in effect on the date of the distribution (sale)
Excess Distribution Cont. Excess distributions allocated to prior years is subject to tax at the highest rate of tax in the year concerned. The resulting tax draws and interest charge. oas if it were an underpayment of tax
PFIC New Information Reporting Beginning with the 2013 tax return year, every owner of a PFIC must file an 8621 annually (with limited exceptions). No filing requirement for suspended tax years.
New PFIC Reporting Cont. Reporting Exception: Excess Distribution Regime No tax under excess distribution regime Aggregate value of all PFIC shares held does not exceed $25,000 ($50K if joint filing) PFIC that is owned is owned by another PFIC See Regulations Exception: PFICS in Foreign Pension funds But only if an income tax treaty allows the pension to be taxable to a U.S. resident only when there is a distribution.
Forms 3520 and 3520-A Reporting The Wolf Group, PC Fairfax, VA Washington, DC New York, NY (703) 502-9500
Form 3520-A Foreign trust with a U.S. owner must file Form 3520-A Separate from U.S. tax returns filed with Ogden, UT Due date is March 15 th Extend to September 15 th by filing Form 7004 Penalties: o U.S. owner penalty: greater of $10,000 or 5% of the gross value of the portion of the trust s assets owned o Reasonable cause Income Statement, Balance Sheet, info on trust/owners/beneficiaries
Form 3520 Who Must File A U.S. person must file a Form 3520 if during the current tax year: Part I: You are responsible party for reporting a reportable event Part II: You are treated as the owner of any portion of a foreign trust s assets Part III: You receive (directly or indirectly) any distributions from a foreign trust Part IV: You receive gifts or bequests from foreign persons >$100,000
Form 3520 Filing Exceptions Most foreign employer pension plans Most fair market value (arm s length) transactions Canadian retirement plans (RRSP or RRIF)
Form 3520 Filing Issues Separate Form 3520 must be filed for each foreign trust Can file joint 3520 only if you file a joint tax return Filed separately from U.S. tax returns (again to Ogden) Filing date: generally the date on which filer s income tax return is due (plus any extensions granted for the federal income tax return) Extended by filing Form 4868
Form 3520 Part IV Gifts/Bequests from Foreign Persons To calculate the threshold amount of $100,000: Aggregate gifts from different foreign nonresidents and foreign estates if they are related to each other Information to include: Date of gift/bequest Description of property Fair Market Value of property recieved
Form 3520 Penalties Penalties: Greater of $10,000 or 35% of gross reportable amount for transfers or distributions Greater of $10,000 or 5% of assets owned by grantor For gifts/bequests, 5% of the value of the gift/bequest per month, up to 25% Extended statute of limitations 3 years until complete Form 3520 is filed
IRS Amnesty OVDP/Streamlined Procedures The Wolf Group, PC Fairfax, VA Washington, DC New York, NY (703) 502-9500
Offshore Voluntary Disclosure Mostly for those people who can t certify nonwillfulness 27.5% or 50% of highest unreported account balance 50% if account was with a facilitator or foreign financial institution under investigation
FBAR/Information Reports All Income Previously Reported Failed to file some FBARs/Information returns No income failed to be reported Haven t been contacted by the IRS E-file late FBARs/Information returns with explanation No penalties!
Streamlined Procedures Failed to file FBARs and/or other Informational Forms Failed to report at least some gross income from foreign accounts
Domestic Streamlined Procedures Meet U.S. residency requirements (Didn t have US abode and physically outside the US for 330 days or more) Must have previously filed US income tax returns for the last 3 years Failed to report gross income from foreign account and may have failed to file FBARs or information returns File 6 years of FBARs and 3 years of amended returns Penalty = 5% of highest aggregate value of foreign financial accounts subject to the penalty
Foreign Streamlined Procedures Failed to report gross income from foreign account and may have failed to file FBARs or information returns Nonresidency requirements US Citizens and GCH = For any one of the last 3 years for which U.S. tax return due date has passed, didn t have a U.S. aobde AND was physically outside the U.S. for 330 days or mode (Sec 911) Individuals who are not U.S. citizens or GCH = Meet requirement if in any one of the last 3 years File 6 years of FBARs and 3 years of amended returns No penalties!
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