Asset Protection Blog

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Asset Protection Blog

FBAR and U.S. Tax Reporting: Compliance Requirements for Foreign Assets, a Webinar Presented by Asher Rubinstein on February 6, 2019

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I am pleased to announce that, along with two esteemed colleagues, I will be presenting a webinar on February 6, 2019 at 1pm EST. I will be discussing U.S. reporting requirements for offshore assets, how to come into compliance if you haven’t reported these assets, and what the government might do if you fail to report foreign assets and are discovered. I will also be discussing recent IRS enforcement initiatives for non-reporting of Bitcoin and other crypto currencies. This webinar will also explore how to make a disclosure of offshore assets to the IRS now that the IRS Offshore Voluntary Disclosure Program (OVDP) has ended, as well as additional compliance opportunities, including the IRS Streamlined Disclosure Procedures and the IRS Delinquent Informational Return Procedures.

The panel will review these and other priority issues:

  • Explaining the value of not waiting until the IRS shows up on one’s doorstep to fix offshore filing issues
  • What is the statute of limitations on IRS assessment when taxpayers fail to meet their obligations to report their offshore assets?
  • What are the requirements for the delinquent international information return submission procedures and the delinquent FBAR submission procedures? When does a taxpayer qualify for these procedures?
  • In what ways can the Streamlined Procedures (SDOP/SFOP) and other available programs benefit taxpayers?
  • What are the best practices to implement in determining how these voluntary disclosure programs can work for particular clients?
  • How should tax advisers best navigate the disclosure program requirements?

Additional information may be found at the Strafford website, here.

Now Is The Time To Confirm Your Bitcoin Is Tax Compliant

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The value of Bitcoin has surged 125% in 2017 alone.  In addition to its value ascent, it has also gained in legitimacy.  While it was once the currency of choice on the illicit Silk Road “dark web”, shut down by the U.S. Department of Justice in 2013, Bitcoin is now accepted for payments by Amazon.com and other mainstream businesses.  Whether you’ve weathered the Bitcoin roller coaster or invested recently, you must ensure IRS compliance for Bitcoin.

The IRS has taken an interest in Bitcoin for various reasons.  First, Bitcoin is largely unmonitored and stands apart from the traditional structure of U.S. banking with 1099 forms and regular reporting.  There is a huge mass of Bitcoin value that is relatively unknown to the IRS, and gains in value are essentially hidden from the IRS, and the IRS doesn’t like that.  In addition, Bitcoin has a large potential for tax non-compliance, both because its very nature is anonymous, and because Bitcoin holdings give rise to significant IRS reporting (the “FBAR” form, IRS Form 8938, IRS Form 8949, capital gains taxes, etc.) and many Bitcoin owners don’t heed (or even know) the reporting requirements.

In November 2016, the IRS obtained a federal court authorization to issue a “John Doe” summons to Coinbase, Inc., a web-based global digital currency wallet and platform.  The IRS has in the past successfully used the “John Doe” summons to obtain information from financial institutions (e.g., UBS, HSBC and Cayman Islands banks) for a broad class of U.S. taxpayers who are not individually named but whom the IRS has reason to believe may have utilized the financial institution to improperly evade tax.  The John Doe summons upon Coinbase seeks records from 2013 through 2015 for any Coinbase user with a US address, telephone number, e-mail domain, etc., and all records related to disbursement of funds to any user.  A recently filed Affidavit by an IRS agent in the Coinbase enforcement litigation revealed that in 2015, only 802 taxpayers revealed Bitcoin information to the IRS on Form 8949, which is the form applicable to capital gains and losses.  Other virtual currency platforms, such as Localbitcoins, Kraken and ItBit may receive similar summonses for transactions with Bitcoins and other virtual currencies like Ethereum and Litecoin.

Bitcoin’s anonymity feeds its non-compliance, and there are many opportunities to run afoul of tax law and IRS requirements, intentionally or inadvertently.  One issue is the failure to report income with respect to Bitcoin.  In 2014, the IRS issued Notice 2014-21 describing how various income recognition and other US tax principles apply to virtual currency transactions.   In that Notice, the IRS clarified that virtual currencies are “property” subject to income tax, capital gains tax, etc.  This means that if Bitcoin is sold for a profit, that profit is income and is subject to capital gains tax.  The income is reportable on IRS Form 8949 which is then attached to Schedule D of Form 1040.  If you exchange your Bitcoin for goods or services, that too is a taxable event, as the IRS considers you to have earned income on the value of the good or service, less your cost basis in the Bitcoin (i.e., your Bitcoin purchase price).

If you are audited by the IRS regarding Bitcoin, you may have to show multiple cost bases for multiple transactions.  Proper record keeping with respect to Bitcoin is essential.  The IRS could take the position that your cost basis in your Bitcoin is zero, and you would pay tax on the full value of the Bitcoin on the date of the transaction, unless you can provide records of your purchases of Bitcoin.

In addition to income tax issues on Bitcoin income, there are reporting issues irrespective of income.  Because a Bitcoin wallet would be considered by the IRS to constitute an “account”, if you hold your Bitcoins in foreign wallets or on foreign Bitcoin exchanges, then foreign account reporting requirements are triggered, including the FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) and IRS Form 8938 (Statement of Specified Foreign Financial Assets).  If you invested in a foreign fund that invested in Bitcoin, the IRS may consider the fund to be a “PFIC” (Passive Foreign Investment Company), which has its own tax methodology, and IRS Form 8621 would be due.  Penalties for non-reporting foreign accounts are significant, including potentially 50% of the value of the account.

Clearly, the IRS’ increased interest in Bitcoin necessitates proper compliance with respect to Bitcoin assets.  The IRS offers opportunities to come into compliance before the IRS obtains information about unreported assets (virtual or actual) and income, including via a pre-emptive voluntary disclosure (offshore or domestic) of digital currency income and accounts.  A voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving open tax issues, along with peace of mind and finality.

Please contact us to discuss IRS compliance for Bitcoin assets, along with other tax issues.

Live Webinar Featuring Asher Rubinstein: FBAR, US Reporting and IRS Compliance for Offshore Assets

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Asher Rubinstein will be a featured speaker in an upcoming Strafford live webinar, “FBAR and U.S. Tax Reporting and Compliance Requirements for Foreign Assets” scheduled for Tuesday, June 20, 2017 at 1pm EST.  We have a limited number of complimentary registrations for clients and friends of the firm.

The IRS has made modifications over the past several years to the programs that allow for late reporting of previously undisclosed offshore assets.  At the same time, the IRS continually reaffirms its commitment to cracking down on U.S. taxpayers failing to disclose foreign assets. Taxpayers and their advisers must act quickly to take advantage of the benefits of a pre-emptive disclosure, before the IRS learns of the foreign asset from a foreign financial institution, a foreign banker, FATCA (Foreign Account Tax Compliance Act) report, tax treaty with a foreign government or alternative means of discovery.

The two most significant programs aiding taxpayers with unreported foreign assets are the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Procedures for domestic (SDOP) and foreign (SFOP) residents.  Taxpayers may benefit from substantially reduced or no penalties for failure to report offshore accounts and assets.  However, taxpayers and their advisors must be aware of the risks in each of the programs.  The penalties imposed upon taxpayers who willfully fail to disclose offshore assets are extremely punitive.

Taxpayers and their advisers must evaluate whether a disclosure program will help a taxpayer avoid increased IRS penalties, and whether the taxpayer is eligible to enter one of the programs.  Eligibility is very fact-specific.  If eligible, counsel must guide the taxpayer in meeting the very specific information requirements of the disclosure program.  The OVDP, SDOP and SFOP may end at any time without notice, at which point the taxpayer may face the full measure of penalties (including criminal consequences).

The Webinar panel will provide taxpayers, legal counsel and tax advisers with the tools necessary to navigate the new rules regarding the FBAR and offshore voluntary disclosure programs.

We will review these and other key issues:

After our presentations, we will engage in a live question and answer session with participants so we can answer your questions about these important issues directly.

For more information about this Webinar, please visit the Webinar program description.

Contact us with any questions about this Webinar or other offshore reporting and IRS compliance issues.

 

Offshore Tax Reporting Requirements and the 2016 FBAR due April 18, 2017

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Annual tax season is upon us, and we remind readers of important tax reporting requirements that must be met with respect to foreign assets.

  1. “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.

  1. 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.

  1. 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).

  1. 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).

  1. 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).

  1. 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.

Conclusion

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.

 

 

 

 

Upcoming Webinar: FBAR / US Tax Reporting and Compliance for Foreign Assets

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On September 29, 2016, Asher Rubinstein will be the featured speaker in a live webinar, FBAR and U.S. Tax Reporting and Compliance Requirements for Foreign Assets.

Since the Foreign Account Tax Compliance Act (FATCA) was passed in 2010, most countries around the world will report foreign accounts to the IRS.  American taxpayers who do not report foreign assets and income to the IRS (whether innocently or willfully) can be investigated and charged with significant penalties.  In this webinar, you’ll learn about foreign reporting requirements and how to comply with the law and avoid penalties.  Upon completion of this course, you will be able to:

  • Identify what foreign assets must be reported to the IRS and what forms must be filed.
  • Determine whether a client is non-compliant under the following circumstances:
    • If a client did not report foreign assets and income to the IRS.
    • If a client just closes his or her foreign bank account.
    • If the client innocently did not know about the foreign reporting requirements.
    • Is the client inherited foreign assets from a relative who is not American.
    • If the client lives and works in a foreign country.
  • Explain how the IRS could learn about foreign assets if the client doesn’t report them.
  • Describe whether a client who paid tax to a foreign government still has to report the assets to the IRS.
  • Determine whether foreign real estate has to be reported to the IRS.
  • Recognize how to respond when a client receives a letter from their foreign bank.
  • Avoid penalties for not reporting offshore assets.

For more information or to enroll, please see here.

 

The FBAR form, Report of Foreign Bank and Financial Accounts, is due by June 30, 2016 for Offshore Assets

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Once again, the FBAR deadline is upon us. The FBAR, the Report of Foreign Bank and Financial Accounts, previously known as Treasury Department Form TD F 90-22.1 and now known as FinCEN Form 114, is due by June 30, 2016, for foreign financial accounts that existed during 2015. Even if you are on extension to file your 2015 U.S. income tax return, there is no extension for the FBAR filing. The FBAR must be filed electronically.

We’ve written extensively about the FBAR and the many different types of foreign assets that are considered to be “foreign financial accounts” and are required to be reported:

Do You Have an Offshore Account?

FBAR Reporting for Foreign Annuities, Life Insurance and Trusts

Offshore Asset Protection Trusts and FBAR Reporting

Ongoing U.S. Tax Compliance for Foreign Assets

Our attorneys advise U.S. taxpayers on whether their foreign assets are subject to the FBAR.  We also advise on how to correct past FBAR non-filings. In some cases, FBAR non-filing can be corrected without penalties. In other cases, such as when a taxpayer did not file an FBAR and also did not report foreign income to the IRS (interest, dividends, rents, etc.), then it may be possible to come into compliance via a pre-emptive Voluntary Disclosure to the IRS. However, if the IRS already has information about the offshore assets (from the foreign bank, for example), or if the taxpayer is already under investigation or audit, then it may be too late for a voluntary disclosure. Thus, proper timing is critical. We can assist you with these issues regarding reporting foreign assets and minimizing penalties.  Please contact us for a confidential consultation.

It’s Tax Season Again: April 15, 2016 Income Tax Deadline also Includes Foreign Income and Offshore Assets

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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.

The FBAR, Report of Foreign Bank and Financial Accounts, is due by June 30, 2015 for Offshore Accounts

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It’s FBAR season again.  The FBAR, the Report of Foreign Bank and Financial Accounts, previously known as Treasury Department Form TD F 90-22.1 and now known as FinCEN Form 114, is due by June 30, 2015, for foreign financial accounts that existed during 2014, including offshore accounts.  Even if you are on extension to file your 2014 U.S. income tax return, there is no extension for the FBAR filing.  The FBAR must be filed electronically.

We’ve written extensively about the FBAR and the foreign accounts and assets that are required to be reported. We advise U.S. taxpayers on whether their foreign assets are subject to the FBAR.  We also advise on how to correct past FBAR non-filings.  In some cases, FBAR non-compliance can be remedied without penalties.  In other cases, such as when a taxpayer did not file an FBAR and also did not report foreign income to the IRS, then it may be possible to come into compliance via a Voluntary Disclosure to the IRS.  However, if the IRS already has information about the foreign account, or if the taxpayer is already under investigation or audit, then it may be too late for corrective filings.  Thus, proper timing is crucial.  We can assist you with such issues, and with offshore reporting and IRS compliance for foreign assets.

Ongoing U.S. Tax Compliance for Offshore Accounts

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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.

Conclusion

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.