An asset protection lawyer can advise a client with a foreign bank account or assets overseas what reporting requirements they have to report their assets to the IRS. When there have been past failures to report, a voluntary disclosure lawyer can advise a client what it will take to become tax compliant.
Perhaps the most important reporting requirement both to taxpayers and to the IRS in terms of the penalties that can be collected from U.S. taxpayers who fail to file an IRS form, is the FBAR (Form TD F 90-22.1), Report of Foreign Bank and Financial Accounts which must be filed by June 30th each year.
As important as this form is, many taxpayers aren't aware of it, having never told their accountant of their foreign bank accounts, while other taxpayers aren't aware it covers much more than simply foreign bank accounts.
Each U.S. taxpayer must file an FBAR if they have a financial interest in, or signature or other authority over, a financial account. The term "financial account" however includes any bank, securities, securities derivatives, financial instruments account, account in which assets are held in a commingled fund, or mutual fund. A person has a "financial interest" in a foreign financial account if it is maintained for the benefit of the taxpayer, if the taxpayer is the owner of record, has signature authority or other authority, or has a relationship with a corporation, partnership or trust which has a financial interest in the foreign financial account.
Penalties just for failing to file the FBAR (Form TD F 90-22.1), Report of Foreign Bank and Financial Accounts by June 30th each year, can be the greater of 50% of the total balance of the foreign account or $100,000.00, and there is no cap on the amount that can be penalized. An account with one million dollars in assets can thus incur penalties for the taxpayer who fails to report it for six years of three million dollars.
In addition to the yearly requirement of taxpayers to file a FBAR by June 30th each year, a taxpayer must also report their worldwide income on their Form 1040, mark the box indicating they have a foreign account, and complete Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This form requires the taxpayer to disclose transactions which include the creation of a foreign trust, transfers of property or assets to the foreign trust, and receipts of distributions from foreign trusts or other such entities. The penalty for failing to file this form, is 35% of the reportable amount.
A taxpayer with a foreign trust must also file form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner if the taxpayer has an ownership interest in or authority over a foreign trust. The penalty for failing to file this form is 5% of the value of the trust.
A U.S. taxpayer with a foreign corporation must also file Form 5471. There are varying penalties for failing to file this form. Generally the penalty is $10,000 but additional penalties of $10,000 per month up to $50,000 can be imposed after notice is given by the IRS or the penalty waived altogether upon proof of reasonable cause.
Taxpayers are also required to report transactions between a 25% foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the U.S. and a related party. The penalty for failing to file the Form 5472 informational return is $10,000 with an additional $10,000 each month up to $50,000 starting 90 days after the taxpayer has received notice from the IRS of a delinquency.
A taxpayer must report transfers of property to foreign corporations with Form 926. The penalty for not doing so is ten percent of the value of the property transferred up to $100,000 per return and with no limit if the failure to report was intentional. For failing to report interests in foreign partnerships utilizing Form 8865, the penalty is $10,000 with an additional $10,000 each month up to $50,000 starting 90 days after the taxpayer has received notice from the IRS of a delinquency.
There is also separate reporting for currency transactions.
The new FBAR form must also be used for any debit card and pre-paid credit card accounts as such accounts are now reportable foreign financial accounts. Additionally, a U.S. person has a reportable foreign financial account for which the owner of record or holder of legal title is a trust, or a person acting on behalf of such a trust that was established by that person and for which a trust protector has been appointed. Any person who is more than a 50 percent beneficiary in a foreign trust must file a FBAR.
Additionally, anyone doing business in the United States, such as foreign resident aliens and entities that are either resident in the U.S. or doing business in the U.S. must also report their information to the IRS.
In order to prevent persons from avoiding the FBAR requirement by simply giving signing authority over an account to an intermediary, the FBAR also requires information to be provided as to any non-U.S. beneficiary owner of any account for which the taxpayer has power of attorney or similar authority.
The willful failure to file an FBAR is a felony. Although a non-willful failure to file an FBAR can incur a penalty of up to $10,000, a willful failure to file can result in the civil penalty of 50% of the value of the foreign financial account each year, with no maximum cap on the accumulative penalties, other than the six year statute of limitations. As the IRS must prove willfulness, the penalties may be negotiated downward or away altogether by a taxpayer's attorney in situations that arguably show the taxpayer who failed to file the FBAR's did so unintentionally, and was unaware of the reporting requirements. With the availability of the internet and even IRS offices in many countries, such an argument becomes harder and harder to make.
There are also FBAR requirements that apply to corporations and other business entities and to employees who have signature authority as well, though there are exceptions for such employees who have no financial interest in the accounts and where the company's CFO notifies those employees that each account has been included in the company's FBAR.
In addition to the FBAR yearly reporting requirements, many taxpayers are unaware that their reporting obligations begin as soon as they create a foreign trust. IRC Section 6048(a) requires the responsible party to provide written notice of any reportable event on or before the 90th day. These reporting requirements include the amount of money or other property transferred to the trust and the identity of the trust and each trustee and beneficiary. A reportable event includes the creation of any foreign trust, the transfer of any money or property to it by a U.S. person, and the death of a citizen or resident of the U.S. if he or she was treated as the owner of any part of it, or if any portion of the trust was included in the decedent's gross estate.
An owner of a foreign trust may avoid some of the more onerous IRS reporting requirements by insuring that there is a U.S. agent appointed and authorized to act pursuant to IRS Section 6048(b) who then can take care of many of the reporting requirements and which will allow the IRS to make any inquiries directly to that agent.
Beneficiaries must also report any distributions from a foreign trust, the name of the trust, the amount of the distributions and any other information prescribed by the IRS. Separate filings must be made for each foreign trust from which the beneficiary receives a distribution. The beneficiary must report the distribution by the date the beneficiary's tax return for the year in which the distribution is made, is due.
Where taxpayers in the past have used subterfuge to hide their foreign accounts or trusts such as foundations or companies in which a nominee held the shares, the law remains that such taxpayers must report their relationships with such entities and report any distributions and pay taxes on their income.
In compliance with IRS requirements, we must advise you that any U.S. federal tax advice contained in this informational article is not intended to be used nor is it published in order for it to be used and you may not use it for the purpose of avoiding penalties or fines under the Internal Revenue Code. It is not intended to be used nor is it being published in order to promote, market or recommend any specific transaction, tax-related matter or estate planning tax scheme to any party.