Things To Know About Reporting Foreign Assets

Who Must File FBAR (Foreign Bank Account Reporting)

A US person, including a citizen, resident, corporation, partnership, limited liability company, trust, and estate, must file FBAR when they have a financial interest or authority over a financial account located outside the United States. However, they will only need to file if the foreign accounts exceed $10,000 at any time during the calendar year they are filing taxes for.
Whether or not your foreign financial account has produced taxable income, they still need to be reported on FBAR. Living abroad and filing a joint income tax return will affect whether you need to report these assets.

Who Must File Form 8938

According to the IRS, if you are a US person living in the US, you must file Form 8938 if you must file an income tax return and:
  • Filing Single – The total value of your foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
  • Married Filing Jointly – The total value of your foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
  • Married Filing Separately – The total value of your foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
According to the IRS, If you are a US person living abroad, you must file Form 8938 if you must file an income tax return and:
  • Single or Married Filing Separately – The total of your foreign financial assets is more than $200,000 at the end of the year.
  • Married Filing Jointly – The total of your foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. This rule applies even if only one spouse is living abroad
  • Jointly but Unmarried – The total of your foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
You are defined as a person living abroad if you are a US citizen who pays taxes in a foreign country and have been living outside the US for at least 330 days out of a consecutive 12-month period.

Who Must File Form 8938

You file FBAR online through the BSA E-Filing System rather than filing it with your federal tax return. It’s due on or before April 15. However, if you need an extension, you are granted one automatically until October 15 without request.
FBAR is an informational return. However, if you fail to submit your FBAR when you have foreign assets to disclose, the IRS may penalize you.

Don’t File FBAR

A US person will not need to file if they use a consolidated FBAR to report their financial accounts. Additionally, they will not need to file if the accounts are jointly owned with a spouse, and they completed FinCen Form 114a. This authorizes their spouse to file FBAR on their behalf.

You don’t need to report your foreign financial accounts if they fall under one of these categories as well, according to the IRS:

  • They are correspondent/Nostro accounts.
  • They are owned by a governmental entity or by an international financial institution.
  • They are maintained on a US military banking facility.
  • They are held in an individual retirement account (IRA) you own or are a beneficiary of.
  • They are held in a retirement plan that you’re a participant or beneficiary of.
  • They are part of a trust that you’re a beneficiary of – if another US person files the FBAR.

Foreign banks are required to tell the IRS about you.

FATCA requires foreign financial institutions and entities to report information on accounts held by a U.S. taxpayer. In compliance with this law, foreign institutions send information including your name, address, account numbers, balances, and identification numbers to the IRS.
In most cases, foreign banks will ask you to fill out Form W-8 or Form W-9 if you are a US citizen or if you ever lived in the US. Even if you ignore this request for information, a bank may still forward your bank account details or interest on foreign holdings to the IRS if they have reason to believe that you are a US person.

Your foreign accounts may be subject to double taxation.

When you maintain a financial account in another country, you may be subject to taxes in the US and that foreign country. If you are subject to US income tax on your accounts, you may be eligible for a credit or itemized deduction for the foreign taxes you accrued. You may also take advantage of exemptions or preferential tax rates under a tax treaty.

If the foreign taxes are imposed on you by a foreign country or US possession, you can claim a credit. However, the IRS states that only income, war profits and excess profits taxes qualify for the credit. You will file Form 1116, Foreign Tax Credit to claim the foreign tax credit to reduce your tax liability.

If you take an itemized deduction for these taxes instead, you will file them on Schedule A (Form 1040), Itemized Deductions to reduce your US taxable income.

FBAR Penalties

Taxpayers who did not file an FBAR but were required to may be subject to civil and criminal penalties unless there is a reasonable cause.

For a non-willful violation, the IRS levies a fine up to $10,000 per violation. Your violation is not willful if you failed to report your offshore accounts because of “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

On the other hand, willful conduct refers to the intentional violation of the law. For willful conduct, the civil penalty is up to the greater of 50% of the balance in your offshore account at the time of your violation or $100,000. Criminal penalties for knowingly and willfully filing false FBAR are up to $10,000 or 5 years or both. Willful failure to file FBAR or retain required records is up to $250.000 or 5 years or both. If violating certain other laws too, this penalty increases to up to $500,000 or 10 years or both.

Form 8938 Penalties

If you did not file Form 8938 or if you understated taxes related to your foreign assets, you may be subject to a $10,000 penalty. Failure to file within 90 days after you receive a notice from the IRS may add penalties up to $50,000.

For underpaid taxes due to undisclosed foreign assets, you may have to pay a penalty equal to 40% of the underpaid amount. If the underpayment is due to fraud, the penalty increases to 75% of the underpaid accounts.

Like FBAR, you may also be subject to criminal penalties.

In Conclusion

If you have foreign accounts that exceed certain thresholds, you are required to report them. In addition, as a US person – which includes resident aliens, you have to pay income tax on your worldwide (US and foreign) income, which may include investment income. It is essential that you report your assets and income from abroad.

If you have foreign accounts to disclose or pay taxes on or if you did not disclose offshore accounts that you should have, it is recommended to get professional help. A tax professional can help you understand your reporting obligations.

Be sure to consult with your tax professional to analyze your specific tax situation. At Taxperts, we can assess your small business structure and suggest ways to increase your savings. Check out our website, Facebook page, or LinkedIn page to learn more.

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