Whether you have been properly reporting your foreign assets to the IRS regularly, or have entered the IRS Offshore Voluntary Disclosure Program (OVDP) and/or submitted FBARs for past years in order to make your foreign assets tax compliant, you must ensure ongoing tax compliance. With the April 15 income tax deadline just around the corner, we offer the following primer on ongoing tax compliance for offshore accounts.
1. “Check the Box” on IRS Form 1040, Schedule B
If you maintained a foreign financial account at any time during 2014, 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 2014, you must still “check the box” if you maintained the account during any part of 2014. If you received a distribution from, or were the grantor of, or a transferror to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and also file IRS Form 3520/3520A.
2. 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 during 2014 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) for tax year 2014. If you received a rental income from foreign real estate, you must declare it. You may be eligible to deduct real estate expenses and real estate taxes. 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 be declared.
3. 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 assets (including interests in offshore trusts and corporations, bonds, mutual funds, annuity and insurance policies). IRS Form 8938 is due with your annual tax return (usually April 15, unless you obtain an extension). Our prior guidance on Form 8938 may be found here.
4. Additional Forms for Entities (Foreign Trusts, Corporations, etc.)
If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2014 you received assets from such a foreign entity, then you may also be required to file IRS Forms 3520 and 3520A. If you had an interest in a foreign corporation that is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is due. These forms are usually due with your income tax return (IRS Form 1040, due April 15, 2015).
5. The FBAR – due June 30, 2015
The FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), must be filed by June 30, 2015 for calendar year 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 and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2014. If you had a foreign account at any point during 2014, then the FBAR must be submitted by June 30, 2015. Thus, even if you closed the account sometime during 2014, you must still file an FBAR. The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products. Note that the FBAR is now known as FinCEN Form 114, and must now be filed electronically. There are no extensions for the FBAR, even if you obtain an extension to file your annual income tax returns (e.g. Form 1040). Our prior FBAR guidance may be found here.
Whether your foreign assets have always been in U.S. tax compliance, or whether the OVDP and/or submission of retroactive FBARs allowed you to bring your foreign assets into tax compliance, you must continue to be tax compliant going forward. Please ensure that your offshore assets continue to remain tax compliant by adhering to the ongoing reporting and tax requirements.
If you have any questions or would like our assistance in preparing the 2014 FBAR, please contact us.