May 2, 2016

Foreign Asset Reporting

The IRS has continued to enforce the reporting of foreign assets.   Failure to properly report either direct or indirect ownership of foreign assets could result in at least $10,000 in fines and  possible criminal penalties. Although we carefully review each client’s situation as we prepare annual filings, a general understanding of the various reporting obligations should ensure that we meet all obligations so that no penalties are assessed.

What foreign assets are required to be reported?

Very generally, foreign assets that must be reported  includes ownership or signature authority over foreign bank accounts, an interest in a foreign trust, ownership in a foreign corporation, or an interest in a foreign partnership.

How can I properly report these assets?

Form 114, Report of Foreign Bank and Financial Accounts, must be filed (separately from your individual tax return) by June 30,2016. No extensions are permitted. Note that for tax years beginning after December 31, 2015, Form 114 will be due April 15th, and a six-month extension may be requested. The 2016 Form 114 will therefore be due April 15, 2017, or October 15, 2017 if an extension is granted. In reviewing your own personal tax situation, it is important to review both your direct and indirect interests in foreign entities. Other required foreign asset reporting must be satisfied with additional forms filed with your tax return (including extensions). Some examples include:

  • Form 8938, Statement of Specified Foreign Financial Assets: Generally, if the total value of your foreign assets exceed $50,000 in value, they should be reported on this form. For more information regarding this form, click here.
  • Form 3520 or Form 3520-A, Annual Returns to Report Foreign Trusts: Generally, if you are a grantor or beneficiary of a foreign trust, you should file this informational form with your tax returns.
  • Form 5471, Information Return for Certain Foreign Corporation: Generally, if you own an interest in a foreign corporation or serve as an officer of a foreign corporation, this informational form may be required to be filed with your tax returns.
  • Form 926, Transfers to Foreign Corporations: If your contributions to a foreign corporation exceed $100,000, you may be required to file this informational form.
  • Form 8865, Information Return for Certain Foreign Partnerships: Generally, if you own an interest in a foreign partnership, this informational form may be required to be filed with your tax returns.
  • Form 8858, Information Return for Certain Foreign Disregarded Entities: Generally, if you own an interest in a disregarded entity, you may be required to file this informational form with your tax returns.

How should I report foreign assets that were inadvertently not reported in prior years?

The Offshore Voluntary Disclosure Program (OVDP) allows taxpayers to voluntarily report assets that were inadvertently not reported in prior years. The IRS announced favorable changes to the Offshore Voluntary Disclosure Program effective July 1, 2014.  These changes apply to those taxpayers whose failure to properly report their foreign assets was “non-willful.”

Taxpayers may qualify for the streamlined OVDP program via two different scenarios:

  1. Procedures for resident U.S. taxpayers
  2. Procedures for non-resident U.S. taxpayers

Under the  OVDP’s previous mandates (prior to July 1, 2014), participants paid a penalty of 27.5-percent of the highest aggregate balance of their value of offshore assets during the prior eight years.  In order to encourage more taxpayers to participate in the OVDP , the IRS’ he new program has reduced the penalties associated with failure of reporting  the foreign assets (see below).In exchange, the IRS requires additional information from the taxpayer.

Two types of taxpayers qualify for OVDP and are subject to different penalties, as listed below.

  1. U.S. citizens or permanent residents who reside in the U.S. (5-percent penalty)

Taxpayers who qualify for this scenario have filed their U.S. tax return for the previous years and have properly reported their income on their tax returns.

  1. S. citizens or permanent residents who reside outside the U.S. ($0 penalty)

Taxpayers are either U.S. citizens or permanent residents who have physically lived outside of the U.S. for at least 300 full days for any one or more of the most recent three years.

In both scenarios, the taxpayer’s failure to report foreign assets must be non-willful.

The previous OVDP was only available to nonresident nonfilers with a tax liability of $1,500 or less.  The IRS made the new program available to a wider group of taxpayers.  The IRS eliminated the $1,500 tax liability limitation and the risk questionnaire.

Taxpayers in either scenario are required to file any amended/missing tax returns for the past three years along with the foreign account reporting forms (FBAR) for the past six years.  All taxpayers are must also sign a certification of non-willful conduct.   Taxpayers are required to pay their offshore penalty at the time they submit the application.

If taxpayers do not willfully report their foreign assets, they will be assessed a penalty of 50-percent and may be subject to criminal penalties as well.

If you have any undisclosed foreign assets that were mistakenly omitted from prior filings, please do not hesitate to contact us. We are happy to assist you with proper asset reporting procedures .

Foreign asset reporting is complex.  Please feel free to contact us to discuss your specific situation and any reporting that may be required.