Annual tax season is upon us, and we remind readers of important tax reporting requirements that must be met with respect to foreign assets.
- “Check the Box” on IRS Form 1040, Schedule B
If you had signature authority or a financial interest (e.g., ownership) in a foreign financial account (including a bank account, securities account, brokerage account, etc.) at any time during 2016, 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 5, below). This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, such financial accounts in a foreign country. Even if you closed the accounts during 2016, you must still “check the box” if you maintained the accounts during any part of 2016. 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 income (including interest, capital gains, dividends and pension distributions) realized during 2016, 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) for tax year 2016 (e.g., IRS Form 8621). If you received rental income from foreign real estate or realized gains from the sale of foreign real estate, you must declare it. You may be eligible to deduct real estate expenses and real estate taxes paid to a foreign tax authority. 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.
- IRS Form 8938
IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, 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). IRS Form 8938 is due with your annual tax return (April 18, 2017, unless you obtain an extension).
- 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 2016 you received assets from the a 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 18, 2017).
- The FBAR – due April 18, 2017
This year, 2017, is the first year that the deadline for the FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), is the same as the deadline for submission of income tax returns (1040s), for calendar year 2016. The FBAR must be filed by 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 2016. 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 participated in the IRS Offshore Voluntary Disclosure Program (OVDP), Streamlined procedures or submitted retroactive FBARs, you should ensure ongoing compliance by timely submitting the 2016 FBAR. If the accounts existed at any point during 2016, then the FBAR must be submitted by April 18, 2017. Note that the FBAR is now known as FinCEN Form 114, and must be filed electronically. This year, also for the first time, a taxpayer may obtain an automatic extension to file the FBAR. The extended due date is the same as one’s extended income tax deadline (October 15, 2017).
- 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 2016 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 need to pay your tax liability by April 18, 2017, while you have until October 15, 2017 to file your tax return and FBAR. This means that your voluntary disclosure strategy needs to be formulated prior to reporting to the Government the existence of foreign accounts via the FBAR, Form 8938, etc.
Please ensure that your offshore assets are tax compliant by adhering to the ongoing reporting and tax requirements. If you have any questions or would like our assistance in formulating a disclosure strategy or in preparing the 2016 FBAR, please feel free to contact us.