As we approach the April 15, 2015 deadline for submission of income tax returns to the IRS, readers should be reminded that the U.S. Internal Revenue Code taxes world-wide income. Thus, if you are a U.S. taxpayer and you have income from foreign sources, for example: interest earned in a foreign bank account, foreign stock dividends, interest on foreign bonds, rents from foreign real estate, even income from foreign retirement plans, offshore trusts, etc., you must declare this income to the IRS.
In addition, if you have “a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country”, then you must answer the questions on IRS Form 1040, Schedule B, Part III. These questions also refer you to the FBAR Form, Report of Foreign Bank and Financial Accounts, FinCEN Form 114. The FBAR for 2014 is due June 30, 2015.
In addition, IRS Form 8938, Statement of Specified Foreign Financial Assets, is due with income tax returns by April 15, 2015. Form 8938 is due even if the same foreign assets are reported on different IRS forms, such as Form 3520 for foreign trusts, Form 5471 for foreign corporations, and the FBAR form.
The following are examples of foreign assets that are subject to reporting on Form 8938:
- foreign bank accounts;
- foreign brokerage and securities accounts;
- stock of foreign corporations and interests in foreign LLCs and partnerships;
- interests in a foreign entity such as a trust or foundation;
- ownership of foreign financial instruments, such as bonds and promissory notes;
- ownership of foreign investment instruments and contracts issued by a foreign entity, including foreign annuity policies and insurance policies;
- interests in a foreign investment fund, hedge fund, mutual fund and private equity fund.
The Foreign Account Tax Compliance Act (FATCA), passed by Congress in 2010, is already in effect between the U.S. and many countries, and will soon come into effect world-wide. Under FATCA, foreign financial institutions (FFIs) will soon begin to report to the IRS regarding US owners of foreign assets. If the IRS has obtained information about foreign assets, and a taxpayer hasn’t filed the 8938 form reporting those assets, this would likely trigger an audit and penalties. It is imperative to file Form 8938 before the IRS first learns of the asset from an FFI.
For our prior guidance on IRS Form 8938, please read our article here.
For a helpful comparison between Form 8938 and the FBAR, please click here.