Tax season is again upon us. We remind readers that ownership of offshore assets (including a wide group of disparate assets, such as bank accounts, business interests, rental real estate, insurance policies, mutual funds, foreign corporations, foreign trusts) are subject to significant IRS reporting requirements. In addition, the new tax law changes passed by Congress at the end of 2017 now allow the IRS to reach, and tax, certain types of foreign companies that previously were not within IRS reach. It is important to understand and abide by the numerous, and complex, reporting requirements for foreign assets.
1.“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 2018, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7a.
If your foreign account(s) were valued at more than $10,000 in the aggregate, you must also “check the box” on line 7a regarding the FBAR form, FinCEN 114 (see item 4, below). On line 7b, you must enter the country or countries where the foreign account is located. The 2018 FBAR form is due on the same day that your tax return is due: April 15, 2019.
Even if you closed a foreign financial account during 2018, you must still “check the box” if the account was open during any part of 2018. 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.
2. 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) earned during 2018. 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 2018 (e.g., IRS Form 8621).
In many cases, if the foreign income was taxed in a foreign country, whether by withholding at the source or by filing a foreign income tax return, you may be able to get a credit on your U.S. income tax return for foreign taxes that you 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. Likewise, even if foreign rental income was offset by foreign real estate costs, you must still report the rental income and take the credits.
3. 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 and/or on the FBAR form (discussed below). IRS Form 8938 is due with your annual tax return (Monday, April 15, 2019, unless you obtain an extension).
4. The FBAR – also due April 15, 2019
The 2018 FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), is due on the same day as your 2018 income tax return (Form 1040): April 15, 2019. 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 2018. 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 FBARs for past years, you should ensure ongoing compliance by timely submitting the 2018 FBAR. If the accounts existed at any point during 2018, then the FBAR must be submitted by April 15, 2019. The FBAR must be filed electronically on FinCEN’s website. An extension to file the FBAR is available. The extended due date is the same as one’s extended income tax deadline (October 15, 2019).
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 2018 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 memo 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 15, 2019), but note that the due date for Form 3520A could be sooner (by March 15, 2019).
As part of the tax law changes that Congress passed at the very end of 2017, the U.S. tax rules for CFCs became more complex, and the reach of the IRS to foreign companies and foreign income has become more expansive. The new law imposes traps whereby interests in foreign companies that were previously not subject to U.S. taxation are now taxed. If you have interests in foreign companies, you must be sure that your interests are compliant with the new laws and IRS regulations.
6. Strategic Concerns
Although the IRS Offshore Voluntary Disclosure Program (OVDP) ended in 2018, taxpayers with non-compliant offshore assets still have the opportunity to come forward and become compliant, provided that the IRS does not already have their information (e.g., from a foreign bank, treaty request, FATCA, audit, etc.). For taxpayers whose facts may be considered by the IRS to be “willful” (e.g., intentional non-reporting, use of tax haven jurisdictions, use of foreign entities such as trusts or corporations), pre-emptive disclosure is still possible, with lower penalties than would apply if the IRS otherwise discovers the assets.
For taxpayers whose facts are non-willful or more benign, the IRS Streamlined Procedures continue to be available, with a limited look-back period and lower (or no) penalties. If there was no tax loss to the IRS from the foreign assets, then the Delinquent Informational Return Procedures may allow for zero penalties.
If you are still grappling with bringing your foreign asset into U.S. compliance but have not yet filed FBARs, submitted a Streamlined application, or consulted with a tax compliance attorney, or you are undecided as to whether or not to make a disclosure, you may want to consider requesting an extension for your 2018 tax returns and FBAR, until October 15, 2019.
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 15, 2019, even though you have until October 15, 2019 to file your 2018 tax return and FBAR. You must formulate your offshore disclosure strategy prior to reporting to the Government the existence of foreign assets via the FBAR, Form 8938, etc.
Owning foreign assets is legal and proper, but all IRS reporting rules and regulations must be met to avoid expensive penalties. In addition, the recent changes in U.S. tax law creates a potential trap for U.S. taxpayers with ownership interests in certain foreign corporations.
If you have any questions or would like our assistance in formulating an offshore disclosure strategy or in preparing the 2018 FBAR or other IRS filings, please contact us.