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New IRS guidance Announced for IRS Streamlined Offshore Procedures.

In the midst of tough tax season, many U.S taxpayers are unfortunately surprised to discover that they have a U.S. tax reporting obligation on financial accounts or assets held overseas. Once they discover their tax and reporting obligation, there are a number of programs through which they can become compliant.

One option, if the taxpayers meet the requirements, is to file under the Streamlined Domestic Offshore Procedures (SDOP) or the Streamlined Foreign Offshore Procedures (SFOP). Our firm has recently received many inquiries regarding these new IRS Streamlined Offshore Procedures. These programs require U.S. taxpayers to certify that their prior non-compliant conduct was non-willful.

The IRS earlier this month announced new guidance under the Streamlined programs. The new guidance announces three new frequently asked questions to guide taxpayers in navigating the complex Streamlined programs.  The new questions are presented below:

 

Q13 What facts do I need to include in completing the narrative statement of facts portion of the Form 14654? Provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Include the whole story including favorable and unfavorable facts. Specific reasons, whether favorable or unfavorable to you, should include your personal background, financial background, and anything else you believe is relevant to your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Additionally, explain the source of funds in all of your foreign financial accounts/assets. For example, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it. And explain your contacts with the account/asset including withdrawals, deposits, and investment/management decisions. Provide a complete story about your foreign financial account/asset.

The following points address common situations that may apply to you:

  • We realize that many taxpayers failed to acknowledge their financial interest in or signature authority over foreign financial accounts on Form 1040, Schedule B. If you (or your return preparer) inadvertently checked “no” on Schedule B, line 7a, simply provide your explanation.
  • We realize that some taxpayers that owned or controlled a foreign entity (e.g., corporation, trust, partnership, IBC, etc.) failed to properly report ownership of the entity or transactions with the foreign entity. If you (or your return preparer) inadvertently failed to report ownership or control of the foreign entity or transactions with the foreign entity, explain why and include your understanding of your reporting obligations to the IRS and to foreign jurisdictions.
  • If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. Also provide background such as how you came into contact with the advisor and frequency of communication with the advisor.
  • If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts.
Q14 In one or more of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, I filed joint income tax returns. But my spouse/former spouse will not sign joint amended returns or a joint certification on Form 14654 for a Streamlined submission. What can I do? Am I precluded from using the Streamlined Domestic Offshore Procedures? We understand that in certain cases (including but not limited to separation or divorce), your spouse/former spouse may not be willing to sign joint amended income tax returns or a joint certification on Form 14654.

You may submit a joint amended income tax return with only your signature to Streamlined Domestic Offshore Procedures so long as your joint amended return shows a net increase in tax. Please explain your inability to secure your spouse’s/former spouse’s signature in the narrative statement of facts on Form 14654. And write “SDO FAQ 14” in red ink in the area for your spouse’s signature on the amended returns and Form 14654.

As a matter of routine processing, the Service will request the other spouse’s signature on joint amended returns with only one signature. If at the time the Service makes a request for your spouse’s/former spouse’s signature on a joint amended return or joint certification you are still unable to secure your spouse’s/former spouse’s signature, please respond to the inquiry by referencing this FAQ.

You may not submit a joint amended income tax return with only your signature to Streamlined Domestic Offshore Procedures showing a net decrease in tax or an increase in credit.

Q15 Who can I contact if I have general questions about the terms of the Streamlined Filing Compliance Procedures or completing Form 14654? If you have questions about the terms of the Streamlined Filing Compliance Procedures or completing Form 14654, you may contact the OVDP Hotline at 267-941-0020.

The OVDP Hotline will not provide case-specific or legal advice.

 

 

With the new guidance, very careful drafting and persuasive legal advocacy of a taxpayer’s particular circumstances is still recommended for a clear demonstration of non-willfulness. Beware: the statement can be used against the taxpayer.  The narrative portion of the certification form has always been the most important part of the streamlined submission, because that is what the IRS will review in order to determine whether the taxpayer’s failure to file FBARs and report income from offshore accounts was non-willful.  All certifications are reviewed carefully by the IRS.

While the streamlined program offers a welcome option for many taxpayers with undeclared accounts, other ways to address past noncompliance remain viable, including the OVDP program and Delinquent FBAR Submission Procedures and Delinquent International Information Return Submission Procedures. The analysis to enter the one program versus other alternative options is complex and requires full legal analysis by a competent experienced tax attorney.

The IRS streamlined program makes it easier for some taxpayers and more difficult for others. Detailed analysis is required to ascertain the risk/reward for each taxpayer.  Regardless, as FATCA continues to go fully online (and the cooperating bank list grows), the cost and risk of doing nothing has gone up exponentially. In summary, taxpayers with undisclosed offshore accounts should fully explore some form of voluntary disclosure before it is too late and much more costly.

Our firm presented an informational webinar on the Streamlined Filing Compliance Procedures. Materials from the webinar can be downloaded here: Game Changer Streamline.

Patel Law Offices has consulted with hundreds of clients regarding their offshore asset and income compliance issues. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign assets.

US real property now more attractive for certain foreign investors

On 18 December President Obama enacted the Protecting Americans from Tax Hikes (PATH) Act of 2015, extending several temporary tax relief provisions either permanently or for two or five years.

PATH also amends the Foreign Investment in Real Property Tax Act (FIRPTA) to make US real property significantly more attractive for certain foreign investors. FIRPTA imposes US federal income tax on foreign investors’ income and disposals of US real property, including interests in corporations that hold more than a threshold amount of US real property.

The amendments allow foreign investors to purchase up to 10 per cent of a US publicly traded real estate investment trust (REIT) without being subject to FIRPTA taxation. This is twice the previous threshold. They also abolish an additional tax imposed by FIRPTA on qualifying foreign pension funds that invest in US real estate.

The exemption for Regulated Investment Company (RIC) dividends paid to non-resident alien individuals and foreign corporations, and the treatment of RICs as qualified investment entities under FIRPTA, are also being permanently extended.

  • Reliefs permanently extended by PATH include the Subpart F active financing exception. There is also a five-year extension of the controlled foreign corporation look-through rule for taxable years beginning before 2020.

What is a “FATCA Compliance Certificate”?

Many foreign banks and financial institutions have recently been asking customers for a “FATCA Compliance Certificate”.  The reason for the request is that your country and the US probably signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA), which will allow automatic exchange of tax information between the two countries this year. FATCA is an important part of the US government’s effort to address tax evasion. FATCA is rapidly becoming the global standard in the effort to curtail offshore tax evasion.

FATCA REQUIREMENTS

Put simply, under FATCA, financial institutions will have to report accounts maintained by US tax payers. FATCA-compliant financial institutions in many countries are required to disclose details of their clients’ income, and if they are either residents of the US or financially connected to the US or have any tax residency in US. “US persons” very broadly includes US citizens, green card holders, customers with US addresses or phone numbers, customers with regular payments made to US payees, etc.

Under FATCA, financial institutions, including banks, deposit taking non-banking finance companies, mutual funds, private equity funds, custodians and life insurance companies, will have to maintain information about their customers, including name, address, tax identification number and in cases of individuals, even details such as place and date of birth.

Specifically in India, for example, many Indian banks and mutual funds have started warning customers who are believed to have foreign contacts for a FATCA Compliance Certificate.  Technically, there is no FATCA Compliance Certificate, per se.  Practically speaking, a FATCA Compliance Certificate simply refers to that indicates that the foreign account has been properly reported to US authorities.

FATCA requires financial institutions to carefully review the client records in order to identify foreign customers.  The bank review includes careful scrutiny of bank electronic databases, bank paper files of account records, and interviews of bank managers and relationship managers regarding customers’ foreign status.

If a customer is deemed foreign upon initial review, numerous other questions are to be raised by the financial institution and answered by the customer.  In addition, information and documentation may be required by the customer, such as self-certification forms stating residency and tax information of the customer.  Often, a foreign tax identification number, such as a US Social Security number, is solicited.  All of the foregoing documentation often constitutes a FATCA Compliance Certificate.  A FATCA Compliance Certificate cannot be applied for or acquired from the US government.  In the parlance of the US government and US tax law, a FATCA Compliance Certificate does not exist.

Absent receiving such a FATCA Compliance Certificate, many financial institutions have threatened to freeze or close accounts. In fact, our firm has fought against several financial institutions that have alleged noncompliance by customers and have frozen customers’ accounts, without notice or opportunity to cure.

If you get a FATCA letter, you should immediately speak with a US tax attorney to ascertain your US tax compliance. Several voluntary disclosure solutions are available to noncompliant persons in order to clean up any instances of delinquent or failure to file tax returns.  Most importantly, noncompliant persons must clean up their noncompliance mess before the government finds them, after which it is too late.

US passport and green-card has lost its glamour

A US passport or green-card is losing its glamour and appeal. Some people are surrendering their prized green cards because of the US Foreign Account Tax Compliance Act (FATCA), which requires most foreign governments and the US to freely exchange financial account information, leaving no asset concealed.

The US, with broad information reporting and high tax rates, has one of the most complex and sophisticated tax systems in the world.  The failure to timely disclose and pay tax on undisclosed cash and property could lead to high penalties.  Under FATCA, US connected persons will have to declare all their assets held worldwide to the US government.

Many people are closing bank accounts to hide financial trails and “gifting” assets spouses, children, or relatives. Those doing so may further complicate their situation since the US has an elaborate gift tax regime, which taxes most gifts.

To minimize US tax, green-card holders residing outside of the US should explore the tie breaker provisions of US income tax treaty to minimize tax to India (but not US information reporting). Unfortunately, this option is unavailable to US citizens abroad (green-card holders only).

Although frequently overlooked or misunderstood, all income tax treaties have a set of rules called “tie-breaker” rules. If a person can be considered a resident of the United States (under its normal tax laws) and also a resident of another country (under its normal tax laws), then in order to prevent double taxation to that person, you look at the tie-breaker rules to exclude income in the non-resident country. This opportunity is different than the normal foreign tax credit calculations (which presumes the income is taxable in both countries).

A misunderstood possibility is transferring the assets to a non-US person or a trust in order to avoid reporting in the US. This possibility requires a careful analysis of the US gift tax that may apply to such a transfer and the complex area of US tax law applicable to foreign trusts.
Another misunderstood possibility is renunciation of US citizenship. To deter tax avoidance by abandonment of citizenship, the US tax law imposes an expatriation tax on some of those who give up U.S. citizenship. The tax also applies to green-card holders who abandon U.S. residency after having held a green card for at least 8 of the last 15 tax years.

While a US passport or green-card has lost its glamour and appeal, it is now more of a burden than a benefit. With no simple strategies, professional advice is required to explore and navigate strategies to remain compliant.

 

New FBAR Deadlines and Penalty Relief available

The US Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Act) has changed the filing date for the Report of Foreign Bank and Financial Accounts (FBAR), electronically filed with the Financial Crimes Enforcement Center (FinCEN) on Form 114, effective for reports for calendar year 2016 accounts due in 2017. The Act also extends the due date (as so modified) and provides for the possibility of penalty relief for first-time FBAR filers.

In general, and subject to certain exceptions, persons having either a financial interest (as defined) or signature authority (as defined) over a foreign bank, brokerage or other financial account during a calendar year must report it to FinCEN (not the IRS) electronically using the BSA E-Filing System on FinCEN Form 114 (which has superseded the prior Form TDF 90-22.1, Report of Foreign Bank and Financial Accounts).) Questions on both corporate and personal income tax returns are designed to remind taxpayers of this requirement, but the filing of the FBAR is distinct and separate from the requirement to report ownership of foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets.

For years prior to the application of the changes made by the Act, FBARs are due to FinCEN on or before June 30 for reportable foreign financial accounts from the previous calendar year. For example, to report signature authority or financial interest in a foreign bank account for calendar year 2014, the FBAR was due to FinCEN by June 30, 2015. In addition, the June 30 deadline for FBARs for such years cannot normally be extended.

New FBAR reporting guidelines and New due date for Form 114

For calendar year 2015, the current due date of June 30, 2016, is expected to remain unchanged. For reports for calendar year 2016 accounts due in 2017 and subsequent years, however, the Act changes the due date from June 30 to April 15 following the year for which an FBAR must be filed, thereby aligning the timing of the reporting requirement with that for income tax returns filed by individuals and C-corporations.
Newly available extensions of time to file Form 114

In addition, the Act provides authority to grant a six-month FBAR filing extension period ending on October 15. Such an extension had not previously been available for filing of the FBAR forms. Although the Act states that the provisions for requesting an extension should operate “under rules similar to the rules in Treas. Reg. Section 1.6081-5,” the details on the mechanics are currently unclear.
Potential first-time filer penalty relief

The Act also calls for a potential penalty relief for those with the first-time requirement to file FBARs. It explicitly states that, “[f]or any taxpayer required to file [an FBAR] for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary.”

Implications

The new accelerated deadline will create some complications for FBAR filers, not only for an individual with his or her own financial interests but also for US organizations with foreign bank accounts and US organizations with officers and employees holding signature authority over foreign bank accounts. The ability to request an extension, however, provides welcome relief and may mitigate some of these issues. FBAR filers will now have to determine by April 15, 2017, whether they will need an extension because they might have had a reportable financial interest in or signatory authority over a foreign account in the prior calendar year. Questions still remain on the extension, such as to what the request for an extension will look like, if it will be required to be filed electronically as the FBAR filing is, with what organization (i.e., FinCEN or the IRS) the extension may need to be filed, and whether third-party preparers filing signature authority FBARs on behalf of others will be able to apply for such extensions.

The grant of authority to waive penalties for first-time filers is welcome news. The details and the mechanism for requesting such relief, however, are unclear. Additionally, it is unknown how the first time waiver provision will interact with the current Delinquent FBAR Submission Procedures for taxpayers who currently qualify for penalty waiver.

Protective Filing of Information Returns

There is an increased focus by the Internal Revenue Service (IRS) on offshore activities.  There are tax return and information return filing obligations that may be associated with foreign income, assets and transactions. Many taxpayers (including non-U.S. persons who might not otherwise consider themselves U.S. taxpayers) should resolve any reasonable doubt they might have in favor of filing.

Information Return Filing Obligations

U.S. citizens, U.S. green card holders and U.S. corporations are clearly required to file a U.S. income tax return each year if their income meets the filing threshold. Less clear is whether such U.S. persons must file “information returns” for activities in which they may be involved outside of the United States, and whether non-U.S. persons who have some U.S. business-related activity are required to file U.S. income tax returns. Some examples of these situations are as follows.

U.S. persons involved in funding a foreign arrangement (such as a will or a retirement plan) may not readily be able to determine whether the arrangement constitutes a trust for U.S. tax purposes. There may be a need to file  additional information returns (Forms 3520 and/or 3520A) to report a foreign trust?

A U.S. person with an ownership interest in a foreign corporation may need to file an information return, such as a Form 5471, to disclose that ownership.

A U.S. person with an ownership interest in a foreign account may need to file a FBAR Form FinCEN 114. This form is independent of the tax return and a separate filing requirement. The FBAR applies to any U.S. person who owns, has beneficial interest or signature authority over foreign financial accounts that exceed $10,000 in the aggregate in value at any time during the year. If you have any foreign bank accounts, this also has to be disclosed on Part III of Schedule B, whether the FBAR is required to be filed or not. FinCEN 114 must be e-filed and cannot be mailed, with the absolute filing deadline on June 30, with no extension possible.

A U.S. person with an ownership interest in foreign accounts may also need to file a Form 8938. This form, also known as the Fatca form, is used to report Specified Foreign Financial Assets and the income derived from them. There is some overlap with the FinCEN 114 Form (FBAR), but the filing thresholds are higher, and depend on the taxpayer’s residency and marriage status, with different thresholds for the highest value reached during the year and on the last day of the year. These thresholds range from a low of $50,000 to a high of $600,000.

It is advantageous to make a “protective” filing of tax returns or information returns. The primary reason is that if the IRS later concludes that such a return is required, then a protective filing of the return can preserve numerous benefits for the taxpayer which would not have been available had the taxpayer not made such a protective filing.

The first major benefit is to get the statute of limitations started.  The statute of limitations for assessing taxes generally determines the length of time that the IRS is allowed to propose adjustments to a filed tax return. If the statute of limitations has expired with respect to a particular tax year, then the IRS is precluded from making such adjustments for that year. Generally, the statute of limitations for tax returns is three years starting from the date of filing or the date it was due (if later). The statute can be extended to six years if there is a “substantial understatement” of income. If a taxpayer never files a tax return with respect to a given taxable year, then there is no statute of limitations on the IRS’s right to assess additional taxes for that year. Regardless of the length of the statute of limitations, therefore, it is imperative to get the statute of limitations running.

The statute of limitations does not begin to run until a tax return is filed. Moreover, if certain information returns reporting transfers or ownership of assets outside the United States are required parts of the tax returns, then the statute of limitations does not begin to run until the required information returns are filed, because the tax return otherwise is considered incomplete. Sometimes, it is not entirely clear whether an information return is required to be filed, especially when foreign arrangements are involved. For instance, a U.S. person who has an interest in or makes a contribution to a foreign trust is required to file Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and/or Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner). Unfortunately, it may not be easy to determine whether some of the foreign arrangements constitute a trust for U.S. tax purposes. A foreign estate planning arrangement or a foreign foundation may be deemed a trust for these purposes.

A taxpayer probably should take a conservative approach and make a protective filing of the IRS forms.  Likewise, if a U.S. person has certain involvement with or ownership interest in a foreign corporation, then that U.S. person may be required to disclose that involvement or ownership on a Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations). Again, if the facts are not entirely clear as to the requirement of filing such an information return, a protective filing should be considered to get the statute of limitations running.

Avoid Failure to File Penalties

Another advantage of making a protective filing is to avoid failure to file penalties. For example, if the IRS later determines that a foreign arrangement constitutes a trust, and Form 3520 and/or Form 3520-A should be filed, then failure to file the return can subject the taxpayer to severe penalties. If a required Form 3520 is not timely filed, then the initial penalty is $10,000 or 35 percent of the value of the trust assets in question, whichever is greater. If a required Form 3520-A is not timely filed, then the initial penalty is $10,000 or 5 percent of the gross value of the portion of the trust owned by the U.S. person, whichever is greater. Similarly, if a taxpayer is required to file Form 5471 and fails to do so, the failure to file penalty can be $10,000 for each year for each Form 5471 not filed.

New law complicates US Passport issuance

Pending legislation, H.R. 22 called Developing a Reliable and Innovative Vision for the Economy (DRIVE) Act, is likely to be passed law next month. This law will have major implications for those with federal tax debts wishing to apply for or use a currently-held passport.

The law allows the revocation of a US passport or denial of a US passport application if a person has more than $50,000 in unpaid federal taxes. There are some exemptions, specifically those people currently involved in a “collections alternative” or those who have submitted an IRS offer in compromise, an appeal against a levy (such as a Collections Due Process Hearing), or are protected under Innocent Spouse Relief. Americans traveling for humanitarian reasons will be able to ask for an exception if they’re tax delinquent, and the new rule does not apply to people who are on an IRS payment plan or contesting a tax case in court.

The proposed law has angered some groups, particularly citizens living abroad, who may not receive the IRS’s mail, since the IRS system is not set up to deal with expatriates very well. For those people, their passports are their livelihood, and revoking them could have disastrous consequences. Such people need their passports for many purposes, including for work visas or residency permits, and who may not be receiving mail from the IRS.

Please note that simply owing taxes to the IRS will not likely result in a passport revocation or denial.  However, owing back taxes and ignoring the problem in collections will likely lead to such complications. It is important to defend yourself in case of IRS tax collections, in such a case.

It’s unknown how many people would be affected by the new law, but stay tuned. This is an unprecedented aggressive change in US tax collections law, which will likely scare many people into becoming tax compliant.

What FATCA Means to You and Your Investments

You may have recently received a letter from your financial institution or investment firm asking for some of your personal details.  Typically the letter requests many personal, tax and residency details, such as your country of birth, the country in which you live, tax identification numbers, and whether you pay taxes in any other country, etc.  If you have not yet received such a letter, it may be coming to you soon.

The reason for the letter is that your country and the US probably signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA), which will allow automatic exchange of tax information between the two countries this year. FATCA is an important part of the US government’s effort to address tax evasion. FATCA is rapidly becoming the global standard in the effort to curtail offshore tax evasion.

FATCA REQUIREMENTS

Put simply, under FATCA, financial institutions will have to report accounts maintained by US tax payers. FATCA-compliant financial institutions in many countries are required to disclose details of their clients’ income, and if they are either residents of the US or financially connected to the US or have any tax residency in US. “US persons” very broadly includes US citizens, green card holders, customers with US addresses or phone numbers, customers with regular payments made to US payees, etc.

Under FATCA, financial institutions, including banks, deposit taking non-banking finance companies, mutual funds, private equity funds, custodians and life insurance companies, will have to maintain information about their customers, including name, address, tax identification number and in cases of individuals, even details such as place and date of birth.

TO PREVENT TAX EVASION

The US requires its taxpayers to disclose all global income. Under FATCA, the US government mandates foreign financial institutions to get customers’ personal, tax and residency details in order to identify US persons. To that effect, the US has signed Inter Government Agreements (IGA) with more than 90 countries making it mandatory for these countries’ financial institutions, such as banks, insurance companies and mutual funds, to furnish details of clients or investors who are connected to the US. If the foreign financial institutions refuse to cooperate, FATCA allows the US government to deduct a punitive 30% withholding tax from any payments due to the non-cooperating foreign financial institutions.

INFORMATION COLLECTION

According to the FATCA guidelines, this information needs to be collected only from those investors who have opened “accounts” on or after 1 July 2014 or if they have an account as on 30 June 2014 wherein the value of investments is above $50,000. “Accounts” means any customer holding with a balance or account number (i.e., mutual fund folio, investment account, etc.).

Some financial institutions have already started reaching out to customers directly. Some have started contacting branches, bankers, advisors, and/or intermediate distributors who have been tasked to solicit and provide the customer information. Therefore, your trusted advisors may come and ask you, or simply disclose your name directly (without notice to you) if they have already enough proof that a known connection to the US.

If you get a FATCA letter, you should immediately speak with a competent tax attorney to ascertain your US tax compliance. Several voluntary disclosure solutions are available to noncompliant persons in order to clean up any instances of delinquent or failure to file tax returns.

Most importantly, noncompliant persons must cleanup their mess before the government find them, after which it is too late.

 

Beware of Overlooked Common Overseas Tax Forms

Practically all Americans with any income anywhere in the universe are required to file a U.S. return. Below are some of the most common tax forms that are generally part of an expat-American tax return.

Common Overseas Tax Forms

Form 2555 & 2555- EZ: These forms are for calculating your Foreign Earned Income Exclusion (FEIE) and to calculate your Foreign Housing Exclusion or Deduction. If you meet certain foreign residency requirements, you may be able to exclude up to $99,200 of earned income in 2014 and a portion of your foreign housing expenses from U.S. income tax. Note that this exclusion does not apply to self-employment taxes. If you are self-employed abroad, you are still subject to U.S. Social Security taxes unless you live in one of the 25 countries with which the U.S. has a Social Security Totalization Agreement. The FEIE is generally advantageous to use when income tax rates in the foreign country are lower than in the U.S. and/or your total earned income is below the exclusion threshold.

Form 1116: This is the Foreign Tax Credit form and it is used to claim a credit against your U.S. income tax for income taxes paid in the foreign country. This credit applies both to foreign earned income (wages, self-employment income, etc.) and unearned income (interest, dividends, capital gains, rents, etc.). This is generally the most beneficial form to use for residents of countries with high income tax rates, those with children eligible for the additional child tax credit and those interested in contributing to U.S. retirement plans (traditional and Roth IRAs, SEPs, solo 401(k)s, etc.)

FBAR Form FinCEN 114: This form is independent of the tax return and a separate filing requirement. The FBAR applies to any U.S. person who owns, has beneficial interest or signature authority over foreign financial accounts that exceed $10,000 in the aggregate in value at any time during the year. If you have any foreign bank accounts, this also has to be disclosed on Part III of Schedule B, whether the FBAR is required to be filed or not. FinCEN 114 must be e-filed and cannot be mailed, with the absolute filing deadline on June 30, with no extension possible.

Form 8938: This form, also known as the FATCA form, is used to report Specified Foreign Financial Assets and the income derived from them. There is some overlap with the FinCEN 114 Form (FBAR), but the filing thresholds are higher, and depend on the taxpayer’s residency and marriage status, with different thresholds for the highest value reached during the year and on the last day of the year. These thresholds range from a low of $50,000 to a high of $600,000.

Other Overseas Tax Forms

Not every tax preparer will be familiar with the forms described below. If any of these forms apply to your situation, you will need to make sure that your preparer is qualified to do the work. Many of these forms are quite complex and require special training to prepare. The IRS, for example, estimates that each Form 8621 requires almost 17 hours of record-keeping and more than 14 hours to prepare. These are the forms that are most commonly missed or filed with errors. The list that follows is illustrative and not comprehensive:

  • If you received a gift or inheritance from a foreign person, even though it will generally not be taxable in the U.S., depending on the amount, you may have to report it in Form3520. This form is also used to report transactions that you had with foreign trusts. If you are grantor in a foreign trust, you are likely required to file Form 3520-A in addition to form 3520.
  • If you run your own business in a foreign country, you may have established a company to conduct your business. Depending on the entity’s classification for U.S. tax purposes, which will be a corporation by default or will depend on the classification election made through Form 8832, you may be required to file Form 8858 if the entity is disregarded; Form 5471 if the entity is classified as a corporation; or Form 8865 if classified as a partnership. Transactions between you and your foreign company may have to be reported on Form 926. Failing to file these forms means penalties, generally $10,000 per form. For example, a separate penalty can apply to each Form 5471 filed late, incomplete or inaccurate.
  • If you live in a country with which the U.S. has an income tax convention, you may be entitled to certain treaty benefits with respect to your foreign retirement accounts, re-sourcing of certain U.S. source income to avoid double taxation, taxation of foreign social security, etc. The treaty-based positions taken in your return may have to be disclosed in Form 8833.
  • If you have a brokerage account or other investments (including some foreign retirement accounts) in a foreign country, these investments may be classified as Passive Foreign Investment Companies or PFICs, which are subject to special tax rules that are generally unfavorable in nature. Most foreign mutual funds and ETFs are classified as PFICS. Each PFIC you own is reported on a separate Form 8621.
  • Other forms that could also apply to your situation include Form 5173: Transfer Certificate which is issued by the IRS upon the death of an American citizen overseas, and is a discharge form confirming that all taxes had been paid and which is often required by banks and brokerage firms to release funds to the estate; Form 5472 for certain U.S. corporations with 25% foreign ownership and certain foreign corporations engaged in a U.S. trade or business; and Form 720, Quarterly Excise Tax Return, to report and pay excise taxes on certain foreign life insurance premiums.