We take this opportunity to remind readers of important ongoing tax reporting requirements that must be met with respect to foreign accounts.
The FBAR – due June 30, 2014
The FBAR, Report of Foreign Bank and Financial Accounts, for 2013, must be filed by June 30, 2014. The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, any foreign financial account, including bank or securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2013. If the account existed at any point during 2013, then the FBAR must be submitted by June 30, 2014. Note that the FBAR is now known as FinCEN Form 114, and must now be filed electronically. Recently promulgated regulations now expand the type of offshore assets that require FBAR reporting. Now, foreign annuity policies and insurance policies are required to be reported on the FBAR.
IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank and brokerage accounts and other foreign assets (including ownership interests in offshore trusts and corporations, bonds, mutual funds, annuity and insurance policies). IRS Form 8938 is due with your annual tax return.
“Check the Box” on Form 1040, Schedule B
In addition to the FBAR and Form 8938, if you maintained a foreign financial account at any time during 2013, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7. This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, a financial account in a foreign country. Even if you closed the account during 2013, you must still “check the box” if you maintained the account during any part of 2013. 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 file IRS Form 3520.
Report Foreign Income
In addition to “checking the box” on IRS Form 1040, beneficial owners of a foreign account must report all income (including interest, capital gains and dividends) realized in the foreign account, 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).
Additional Forms for Entities (Foreign Trusts, Corporations)
If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2013 you received assets from such a foreign entity, then you may also be required to file IRS Form 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 such foreign corporation is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is due.
As we have long counseled, it is perfectly valid and legal to own offshore assets. However, one must pay careful attention to the IRS reporting and income tax obligations associated with foreign assets. In light of the eradication of bank secrecy, the reach of the Foreign Account Tax Compliance Act (FACTA) and the IRS’s tenacious pursuit of undeclared foreign assets and foreign income, your foreign assets must be properly reported, and income tax paid on all foreign income, each year.
If you have any questions or would like our assistance in preparing the 2013 FBAR, please contact us.