We are once again immersed in the annual tax season and we remind readers that foreign assets are subject to important U.S. government reporting requirements.
- “Check the Box” on IRS Form 1040, Schedule B
If you owned or had authority over a foreign financial account (including a bank account, securities account, brokerage account, etc.) at any time during 2017, 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 4, below). Even if you closed an account during 2017, you must still “check the box” if the account was open during any part of 2017. 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.
- Report Foreign Income
In addition to “checking the box” on IRS Form 1040, Schedule B, U.S. taxpayers must report all foreign income (including interest, capital gains, dividends, pension distributions, rent, royalties) realized during 2017. 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 2017 (e.g., IRS Form 8621). 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 on your U.S. income tax return, even if U.S. tax due is minimized or eliminated due to foreign tax credits, foreign residency credits or other tax treaty benefits.
- IRS Form 8938
IRS Form 8938, Statement of Specified Foreign Financial Assets, 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). This form is due even though you may have already reported the very same foreign assets on a different IRS form or on the FBAR (discussed below). IRS Form 8938 is due with your annual tax return (April 17, 2018, unless you obtain an extension).
- The FBAR – due April 17, 2018
The 2017 FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), is due on the same day as your 2017 income tax return (Form 1040): April 17, 2018, as FinCEN recently announced. The FBAR must be filed by U.S. 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 2017. 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 owned Bitcoin or other virtual currencies in a foreign account or foreign exchange, you must declare the account. 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 2017 FBAR. If the accounts existed at any point during 2017, then the FBAR must be submitted by April 17, 2018. Note that the FBAR is now known as FinCEN Form 114, and must be filed electronically on FinCEN’s website. An automatic extension to file the FBAR is available. The extended due date is the same as one’s extended income tax deadline (October 15, 2018).
5. 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 2017 you received assets from the 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 17, 2018), but note that the due date for Form 3520A could be sooner (by March 15, 2018).
- 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 2017 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 must pay your tax liability by April 17, 2018, even though you have until October 15, 2018 to file your tax return and FBAR for 2017. This means that your voluntary disclosure strategy needs to be formulated prior to reporting to the Government the existence of foreign assets via the FBAR, Form 8938, etc.
Please take care that your offshore assets are U.S. tax compliant by abiding by the multiple reporting and tax requirements. Penalties for non-compliance can be severe, with additional penalties imposed by U.S. law simply because these are foreign assets. If you have any questions or would like our assistance in formulating a disclosure strategy or in preparing the 2017 FBAR, please feel free to contact us.