Offshore Tax Reporting Requirements and the 2016 FBAR due April 18, 2017

Annual tax season is upon us, and we remind readers of important tax reporting requirements that must be met with respect to foreign assets.

  1. “Check the Box” on IRS Form 1040, Schedule B

If you had signature authority or a financial interest (e.g., ownership) in a foreign financial account (including a bank account, securities account, brokerage account, etc.) at any time during 2016, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7.  If your foreign account(s) were valued at more than $10,000 in the aggregate, you must also “check the box” on line 7 regarding the FBAR form, FinCEN 114 (see item 5, below).  This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, such financial accounts in a foreign country.  Even if you closed the accounts during 2016, you must still “check the box” if you maintained the accounts during any part of 2016.  If you received a distribution from, or were the grantor of, or a transferor to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and also file IRS Form 3520.

  1. Report Foreign Income

In addition to “checking the box” on IRS Form 1040, Schedule B, U.S. taxpayers must report all income (including interest, capital gains, dividends and pension distributions) realized during 2016, on IRS Form 1040.  If you held investments in foreign mutual funds or hedge funds, you may be required to file additional tax forms applicable to “PFICs” (Passive Foreign Investment Companies) for tax year 2016 (e.g., IRS Form 8621).  If you received rental income from foreign real estate or realized gains from the sale of foreign real estate, you must declare it.  You may be eligible to deduct real estate expenses and real estate taxes paid to a foreign tax authority.  In many cases, if foreign income was taxed in a foreign country, you may be able to get a credit for foreign taxes paid.  Even so, all foreign income should still be declared.

  1. IRS Form 8938

IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank, brokerage accounts and other foreign financial assets (including interests in offshore trusts and corporations, bonds, foreign mutual funds, foreign annuity and insurance policies).  IRS Form 8938 is due with your annual tax return (April 18, 2017, unless you obtain an extension).

  1. Additional Forms for Entities (Foreign Trusts, Foreign Corporations, etc.)

If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2016 you received assets from the a foreign entity, then you may also be required to file IRS Forms 3520 and 3520A.  Please contact us for a copy of our memorandum about this issue.  If you had an interest in a foreign corporation, and the foreign corporation is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is also due.  These forms are usually due with your income tax return (IRS Form 1040, due April 18, 2017).

  1. The FBAR – due April 18, 2017

This year, 2017, is the first year that the deadline for the FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), is the same as the deadline for submission of income tax returns (1040s), for calendar year 2016.  The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, foreign financial accounts, including bank and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2016.  The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products.  Recent authority also extends the FBAR to on-line gambling/gaming accounts.  If you participated in the IRS Offshore Voluntary Disclosure Program (OVDP), Streamlined procedures or submitted retroactive FBARs, you should ensure ongoing compliance by timely submitting the 2016 FBAR.  If the accounts existed at any point during 2016, then the FBAR must be submitted by April 18, 2017.  Note that the FBAR is now known as FinCEN Form 114, and must be filed electronically.  This year, also for the first time, a taxpayer may obtain an automatic extension to file the FBAR.  The extended due date is the same as one’s extended income tax deadline (October 15, 2017).

  1. Strategic Concerns

If you have not yet filed an application for the OVDP or submitted a Streamlined application, or if your application is pending at the IRS, or you are undecided as to whether or not to make a disclosure, you may want to consider requesting an extension for your 2016 tax returns and FBAR.

You may request an extension for filing your income tax return by filing IRS Form 4868.  Note that this is an extension to file the tax return, not pay tax due.  You still need to pay your tax liability by April 18, 2017, while you have until October 15, 2017 to file your tax return and FBAR.  This means that your voluntary disclosure strategy needs to be formulated prior to reporting to the Government the existence of foreign accounts via the FBAR, Form 8938, etc.

Conclusion

Please ensure that your offshore assets are tax compliant by adhering to the ongoing reporting and tax requirements.  If you have any questions or would like our assistance in formulating a disclosure strategy or in preparing the 2016 FBAR, please feel free to contact us.

 

 

 

 

Currency is Virtual, but Real Time is Ticking for Voluntary Disclosure of Virtual Currency

virtual money  In the latest step by the IRS to address taxation issues in the digital on-line economy, the IRS has filed its first enforcement against convertible virtual currency, targeting tax abuse of “Bitcoin” transactions.  On November 20, 2016, a Federal Court in California authorized the IRS to issue a “John Doe” summons to Coinbase, Inc., a web-based global digital currency wallet and platform.  The IRS has in the past successfully used the John Doe summons to obtain information from financial institutions (e.g., UBS, HSBC and Cayman Islands banks) for a broad class of U.S. clients who are not individually named but who the IRS has reason to believe have utilized the financial institution to improperly evade tax.  The John Doe summons seeks records from 2013 through 2015 for any Coinbase user with a US address, telephone number, e-mail domain, etc., and all records related to disbursement of funds to any user.  In 2014, the IRS issued Notice 2014-21 describing how various income recognition and other US tax principles apply to virtual currency transactions.  In that Notice, the IRS clarified that virtual currencies are “property” subject to income tax, capital gains tax, etc.

Omission of income from virtual currency transactions or failure to file, especially in relation to offshore transactions or use of foreign accounts, could result in criminal charges related to tax evasion, filing a false tax return and failure to file the FBAR (FinCen Form 114).  Additional charges can include conspiracy to defraud the government.  Even innocent or negligent non-compliance can subject a taxpayer to the assessment of tax, interest and severe civil penalties.  Taxpayers have a limited time period remaining to voluntarily disclose virtual currency accounts and transactions, to correct prior non-compliance, avoid criminal prosecution and usually receive more lenient treatment than in a criminal or civil enforcement proceeding or audit.

Once the IRS obtains information on Coinbase’s users, the IRS will follow with civil tax audits, FBAR audits and criminal investigations.  Other virtual currency platforms, such as Localbitcoins, Kraken and ItBit may receive similar summonses for transactions with Bitcoins and its more recent competitor Ethereum.  The IRS offers opportunities to come into compliance before the IRS obtains information about unreported assets (virtual or actual) and income, including the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Filing Compliance Procedures for taxpayers to disclose digital currency transactions, income and accounts.  A voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving open tax issues.  Time is of the essence to voluntarily report such information before the IRS obtains information pursuant to John Doe summonses, FATCA (the Foreign Account Tax Compliance Act), TIE (Tax Information Exchange) Agreements, etc.  Anyone who has income as a result of transactions through Coinbase, Inc. or any other virtual or digital platforms, or unreported virtual or digital currency assets, should contact Rubinstein & Rubinstein, LLP immediately for a consultation.

Upcoming Webinar: FBAR / US Tax Reporting and Compliance for Foreign Assets

On September 29, 2016, Asher Rubinstein will be the featured speaker in a live webinar, FBAR and U.S. Tax Reporting and Compliance Requirements for Foreign Assets.

Since the Foreign Account Tax Compliance Act (FATCA) was passed in 2010, most countries around the world will report foreign accounts to the IRS.  American taxpayers who do not report foreign assets and income to the IRS (whether innocently or willfully) can be investigated and charged with significant penalties.  In this webinar, you’ll learn about foreign reporting requirements and how to comply with the law and avoid penalties.  Upon completion of this course, you will be able to:

  • Identify what foreign assets must be reported to the IRS and what forms must be filed.
  • Determine whether a client is non-compliant under the following circumstances:
    • If a client did not report foreign assets and income to the IRS.
    • If a client just closes his or her foreign bank account.
    • If the client innocently did not know about the foreign reporting requirements.
    • Is the client inherited foreign assets from a relative who is not American.
    • If the client lives and works in a foreign country.
  • Explain how the IRS could learn about foreign assets if the client doesn’t report them.
  • Describe whether a client who paid tax to a foreign government still has to report the assets to the IRS.
  • Determine whether foreign real estate has to be reported to the IRS.
  • Recognize how to respond when a client receives a letter from their foreign bank.
  • Avoid penalties for not reporting offshore assets.

For more information or to enroll, please see here.

 

The FBAR form, Report of Foreign Bank and Financial Accounts, is due by June 30, 2016 for Offshore Assets

Once again, the FBAR deadline is upon us.  The FBAR, the Report of Foreign Bank and Financial Accounts, previously known as Treasury Department Form TD F 90-22.1 and now known as FinCEN Form 114, is due by June 30, 2016, for foreign financial accounts that existed during 2015.  Even if you are on extension to file your 2015 U.S. income tax return, there is no extension for the FBAR filing.  The FBAR must be filed electronically.

We’ve written extensively about the FBAR and the many different types of foreign assets that are considered to be “foreign financial accounts” and are required to be reported:

Do You Have an Offshore Account?

FBAR Reporting for Foreign Annuities, Life Insurance and Trusts

Offshore Asset Protection Trusts and FBAR Reporting

Ongoing U.S. Tax Compliance for Foreign Assets

Our attorneys advise U.S. taxpayers on whether their foreign assets are subject to the FBAR.  We also advise on how to correct past FBAR non-filings.  In some cases, FBAR non-filing can be corrected without penalties.  In other cases, such as when a taxpayer did not file an FBAR and also did not report foreign income to the IRS (interest, dividends, rents, etc.), then it may be possible to come into compliance via a pre-emptive Voluntary Disclosure to the IRS.  However, if the IRS already has information about the offshore assets (from the foreign bank, for example), or if the taxpayer is already under investigation or audit, then it may be too late for a voluntary disclosure.  Thus, proper timing is critical.  We can assist you with these issues regarding reporting foreign assets and minimizing penalties.  Please contact Rubinstein & Rubinstein for a confidential consultation.

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