A Tax Guide to Foreign Account Reporting For New Immigrants

A Tax Guide to Foreign Account Reporting For New Immigrants

A Tax Guide to Foreign Account Reporting For New Immigrants

U.S. taxpayers who have foreign accounts, assets, investments, income, etc., may be required to file several IRS foreign information returns each year to disclose their offshore account and asset information to the IRS and FinCEN. There are many different types of foreign information returns a taxpayer may have to file, depending on the category and value of their foreign accounts and assets — and some accounts and assets may have to be duplicated on different forms in the same year to report the same information. While many new (and experienced) international tax filers may have heard of the FBAR, there are additional IRS foreign information returns they may have to file as well.

Unfortunately, the failure to file these forms on time may result in significant fines and penalties. However, the IRS has developed several amnesty programs to help taxpayers get into compliance and minimize or avoid penalties. Let’s take a brief look at some of the more important foreign information returns a taxpayer may have to file.

*Update to the original Golding & Golding article published in June 2017.

Are You a U.S. Person for Tax Purposes or Not?

The first, most important question that the taxpayer must determine is whether they are considered a U.S. person for tax purposes. The three main categories of individuals who are considered to be U.S. persons for tax purposes are U.S. citizens, lawful permanent residents (green card holders living in the U.S. or abroad), and individuals who meet the substantial presence test (SPT). Oftentimes, taxpayers meet the substantial presence test because they reside in the United States on a visa such as an H1B, L1, B1/B2, E-3, etc. — although having a visa is not a requirement for meeting SPT.

FBAR (FinCEN Form 114)

The FBAR is the most widely known foreign information return because it is the most general and broad, and has a relatively low threshold filing requirement. This form is used for accounts and assets such as bank accounts, investment accounts, life insurance policies with the surrender value, and foreign pension plans.

• • • A comprehensive guide to FBAR reporting.

*6013(g) Election and the FBAR

If a taxpayer is considered a U.S. person for tax purposes, then they are required to file the FBAR if they meet the threshold requirements for doing so. But it is important to note that just because the taxpayer makes the 6013(g) election to file a joint return with their U.S. person spouse does not make them a U.S. person for FBAR filing purposes. This rule is unique to the FBAR and not necessarily for other international information reporting forms (since the FBAR is a FinCEN form and not technically an IRS form).

Form 8938 (FATCA)

Form 8938 is a relatively new addition to the world of international tax and foreign information reporting. This form was developed in 2012 for the 2011 tax return in conjunction with FATCA (Foreign Account Tax Compliance Act). The form is very similar to the FBAR. Still, it has some additional reporting required, such as income associated with the foreign accounts and assets that are being disclosed — and unlike the FBAR, it is limited to accounts and assets that the taxpayer has a financial interest in.

• • • A comprehensive guide to Form 8938 reporting.

Form 3520/3520-A

Forms 3520 and 3520-A are used for various purposes. The primary reason that taxpayers file a Form 3520 is that they received a gift or inheritance from a foreign person; however, it is also required for taxpayers to receive foreign trust distributions or have ownership of a foreign trust. Form 3520-A is specifically for US taxpayers who have ownership of a foreign trust.

• • • A comprehensive guide to Form 3520 reporting.

    • A comprehensive guide to Form 3520-A reporting.

Form 8621 (PFIC)

Form 8621 has become more common in recent years because it is used to report passive foreign investment companies — and passive foreign investment companies (PFIC) can also include ownership of foreign mutual funds and ETFs. Depending on whether the mutual funds and ETFs are owned in an account are individually will impact the specifics of reporting.

Taxpayers who receive certain distributions may have to pay significant taxes on those earnings, and taxpayers may have the ability to make elections to reduce the overall taxation of the foreign income associated with the PFICs. There are also some exceptions, exclusions, and limitations to filing Form 8621.

• • • A comprehensive guide to Form 8621 reporting.

Form 5471

Form 5471 is very complicated and has become much more complicated in recent years. The form is used to report foreign corporations, and there are many schedules associated with Form 5471 depending on the ownership structure and the type of entity. For example, if a taxpayer acquired 10% or more in one year, they may have to file in that particular year but not in subsequent years. Conversely, taxpayers who have an ownership or an interest in a controlled foreign corporation (CFC) may have to file every year, as well as report additional information regarding subpart F income and GILTI.

• • • A comprehensive guide to Form 5471 reporting.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.