It is tax season once again, which means that 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, e.g., interest earned in a foreign bank account, foreign stock dividends, interest on foreign bonds, rents from foreign real estate, income from foreign trusts, even income from foreign retirement plans, you must declare this income to the IRS, whether or not the income is reportable or taxed in a foreign country.
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 2015 is due June 30, 2016 and must be filed electronically. Although you may get an extension to file your 2015 income tax return, there is no extension possible for your 2015 FBAR.
In addition, IRS Form 8938, Statement of Specified Foreign Financial Assets, is due with your income tax return by April 15, 2016. 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/or the FBAR form.
The following are examples of foreign assets that are subject to reporting on Form 8938, independently of whether the same assets are reportable to the IRS or FinCEN or other forms:
• 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 promissory notes and bonds;
• 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, private equity fund and mutual fund.
The Foreign Account Tax Compliance Act (FATCA), passed by Congress in 2010, is already in effect between the U.S. and many countries. Under FATCA, foreign financial institutions (FFIs) report to the IRS regarding U.S. owners of foreign assets, not merely if the IRS asks, but automatically. If the IRS has obtained information about foreign assets, and a taxpayer hasn’t filed the proper forms reporting those assets, this would likely trigger an audit and penalties. It is imperative to file Form 8938 and the FBAR before the IRS first learns of the asset from an FFI.
We can assist in determining whether you are subject to IRS reporting for foreign assets, and can answer your questions regarding US tax compliance. Contact us for a confidential consultation.
For also see our prior article on IRS Form 8938.
For a helpful comparison between Form 8938 and the FBAR, please click here.