FOREIGN ASSET REPORTING
As we move through the 21st century, the world is becoming an increasingly smaller place. People and businesses are operating across national borders. Assets are owned globally. Recognizing this, and the potential to inadvertently or deliberately avoid US tax on worldwide income, Congress has enacted a numbers of laws to report these foreign assets and the income derived from them. The tax code and money and finance codes contain both potentially harsh civil and criminal penalties designed to ensure compliance with these laws. This page is a brief overview of the ever expanding level of reporting complexity for in a global economy.
Foreign Bank and Financial Accounts: Commonly known as FBAR, is reported to US Treasury on form FinCEN 114 separately from the tax return. Due now on the same day as the tax return, it requires the listing and reporting of any bank account or financial account for which you either own or have signature authority on, when the aggregate value of those accounts exceeds $10,000 at any time during the year. There is no tax associated with this filing, however a late or delinquent filing can be subject to penalties up to 50% of the unreported value for each year the filing is not done.
Foreign Account Tax Compliance Act: Commonly known as FATCA, this law is designed to be more comprehensive in its scope than FBAR. FATCA is reported on Form 8938 and is included as part of the tax return. Included on this form are the ownership of bank accounts, brokerage accounts, retirement accounts, stock, mutual funds, partnership interests, and any other financial asset located outside the United States. Not included are accounts with just signature authority or financial assets reported directly on other forms such as certain stock, partnership interests, disregarded entities, and PFICs. The value threshold for filing also varies based on the taxpayer's filing status and if they are located inside the United State or abroad.
Foreign Stock: US Taxpayers owning 50% or more of a foreign corporation must file Form 5471 as part of their tax return. Taxpayers and corporate officers must also file the form if they or another US person acquires more than 10% of the outstanding stock during the year. The requirements for completing this form vary based on the US and personal level of ownership of the stock, and we do not recommend that laypersons attempt to complete this form without competent professional help. Not only is the form complex, but the reporting and required schedules change based on a number of different factors. In addition, depending on the corporation and where it operates and what it does, US taxpayers may be surprised to find out that they must report income from this corporation even if they did not receive anything, due to the application of what is commonly known as Subpart F.
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A less commonly known element of owning foreign stock is the US reporting for capitalizing the corporation. If you transfer more than $100,000 to a foreign corporation in exchange for at least 10% of its value or voting power, you must complete Form 926 and attach it to your tax return.
Foreign Partnerships: US Taxpayers owning more than 50% of a foreign partnership must include Form 8865 with their tax return, reporting their interest in the partnership. Taxpayers owning more than 10% of a foreign partnership may also be required to file the form as well. This informational reporting is in addition to the reporting of the income from the partnership on the tax return. As with Form 5471, we do not recommend that laypersons attempt to complete this form without competent professional assistance.
Foreign Disregarded Entities: US owners of a foreign entity that is disregarded for tax purposes (such as a US single member LLC is by default) must file Form 8858 with their tax return. Much like Form 8865, this is an information reporting of the business income in addition to the reporting of income directly on the tax return.
Foreign Trusts, Gifts, and Inheritances: US taxpayers would be surprised to know that there is a form for these as well. If you receive a gift or bequest of over $100,000 from a foreign person during the year, you need to file Form 3520 with the IRS. This form is filed separately from the tax return. This form is also used to report the beneficial ownership of a foreign trust, your formation of a foreign trust, and your ownership of a foreign trust.
Tax Treaty Positions: In the course of international diplomacy, the United States has entered into tax treaties with many nations around the world. Some of the treaties specify exceptions to the US tax treatment of foreign income or deductions contrary to stated US tax code. A US person invoking the tax treaty position is required to disclose it on Form 8833 and attach it to their tax return.
Non-Resident Aliens: Non-US persons who reside outside the United States are required to file Form 1040NR to report and pay tax on income earned from US sources. In addition, certain persons residing and working here under immigration visas may be considered to be non-resident aliens under the tax code based upon their visa status.
Foreign Tax Credit: US taxpayers are entitled to a tax credit or tax deduction for taxes paid to foreign governments for income derived outside the US. While deducting the tax is not complicated, it may not be as advantageous as claiming a tax credit. The form and rules for calculating the tax credit on Form 1116 are not simple and it is not recommended that laypersons attempt it on their own.
Foreign Earned Income Exclusion: US taxpayers residing outside the United States for 330 days out of any 12 month period are allowed to exclude from income an annual amount plus certain housing allowances, using Form 2555 on their tax return. This exclusion is limited to income from wages or self employment, and any foreign taxes paid on excluded income are not allowable as a deduction or credit.
Foreign Owned US Corporations: US corporations with one or more non-US persons owning 25% or more of the outstanding stock must file Form 5472 separately from its tax return.