An ever-growing number of businesses and individuals are going global. Familiarity with the U.S. tax forms that are necessary to properly disclose foreign assets and interests is thus paramount. Four critical forms – Foreign Bank Accounting Re-port (FBAR), 8938, 8621, and 3520 – are summarized here, including applicable penalties.
Financial Crimes Enforcement Network (FinCEN) Report 114 – commonly called the FBAR – is filed separately from an individual’s tax return. FBAR filings are governed by the Department of Homeland Security and the Bank Secrecy Act. U.S. persons with financial interests in, or signature authority over, foreign financial accounts must disclose their foreign holdings on the FBAR if the aggregate value of such accounts exceeds $10,000 during the calendar year. Included within the definition of U.S. persons are citizens or residents of the United States and numerous types of entities, including corporations, trusts, partnerships, and limited liability companies created under U.S. law.
Reportable accounts include savings accounts, checking accounts, securities accounts, mutual funds, insurance and annuity policies with cash values, and other types of accounts maintained with a person engaged in the business of banking or securities.
A U.S. person maintains a financial interest in an account if they are either the owner of record (or holder of legal title) or have beneficial interest in the account. Signature authority is present if an individual is able to control the disposition of the account by direct communication with the financial institution holding the account.
The current deadline for the FBAR is April 15 of each year, with a six-month automatic extension currently available. A six-year statute of limitations applies to FBAR assessments.
Two primary penalties exist for FBAR failures: nonwillful penalties and willful penalties.
A nonwillful failure to file an FBAR can be penalized up to $10,000 per account per year. However, this penalty is mitigated by recent IRS guidance (SBSE-04-0515-0025, issued in May 2015 and later reflected in applicable Internal Revenue Manual provisions) stating that, in most cases, examiners will recommend only one penalty per open year (with a one-year $10,000 penalty also recommended in certain circumstances despite multiple open years).
For willful failures, the relevant statute permits penalties in the amount of the greater of $100,000 or 50 percent of the amount of the balance of unreported accounts at the time of the violation (on a per-year basis). In accordance with SBSE-04-0515-0025, in most cases the total penalty for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during all years under an examination.
Form 8938 (filed with the client’s tax return) largely mirrors the FBAR, but has a few important distinctions. Form 8938 is used to report specified foreign financial assets where the total value of all such assets in which the taxpayer has an interest is more than the appropriate reporting threshold. For unmarried individuals living in the United States, the reporting threshold is met if the total value is more than $50,000 on the last day of the tax year or $75,000 at any time during the tax year. For married taxpayers filing joint returns, the threshold is $100,000 on the last day of the year or $150,000 at any time during the year. Higher thresholds are applicable to persons living overseas.
Specified foreign financial assets include financial accounts with a foreign financial institution and certain other foreign nonaccount investment assets. Unlike the FBAR, mere signature authority over an account does not create a reporting requirement.
Failure to file Form 8938 can lead to a $10,000 penalty, with additional $10,000 penalties assessable after notice of the failure up to a maximum of $50,000. Importantly, failure to file Form 8938 can cause the statute of limitations for the entire tax return (not just Form 8938) to remain open. A reasonable cause exception is applicable. If this is met, the statute of limitations remains open only on Form 8938, and remains open until three years after the form has been filed.
Form 8621 is filed by taxpayers who are holders of interests in passive foreign investment companies (PFICs). Specific rules exist for PFIC classification; of primary importance for individuals is that most non-U.S. mutual funds are classified as PFICs. Investments in PFICs are generally subject to high tax rates, and reporting rules are also a source of consternation: each separate PFIC investment is reported on Form 8621, and required calculations are difficult to navigate.
Form 8621 is filed with the individual’s tax return. No specific financial penalties are provided for failures; however, as with Form 8938, a failure to file Form 8621 can cause the statute of limitations to remain open for prospective assessment.
Form 3520 is filed to report certain transactions with, ownership of, or distributions from foreign trusts. It would also be filed to report receipts of gifts/bequests from nonresident aliens. For the latter, filing is required where an individual receives more than $100,000 from a nonresident alien which is treated as a gift or bequest.
Form 3520 is required to be filed on the same date as the individual’s tax return. If not timely filed, the assessment of any tax imposed with respect to information required on Form 3520 does not expire until three years after filing. For failure to report foreign gifts, a penalty equal to 5 percent of the value of such gifts is imposed for each month failure to report continues – with the penalty not to exceed 25 percent. Reasonable cause exceptions exist for Form 3520 failures.
Other reporting forms with similar penalties and statute of limitation implications include the following:
- Form 5471 – To disclose interests in foreign corporations
- Form 8865 – To disclose foreign partnerships
- Form 5472 – For reporting corporations with reportable transaction with a foreign or domestic related party
- Form 926 – To report certain transfers of tangible or intangible property to a foreign corporation
- Form 8858 – For certain U.S. per-sons who own a foreign disregarded entity directly, indirectly, or constructively
As illustrated herein, a multitude of reporting requirements are connected to foreign interests. Given the significant ramifications connected with failures to meet those requirements in this realm, awareness of and familiarity with international forms is paramount.
Patrick J. McCormick, JD, is an associate at Kulzer & DiPadova PA in Haddonfield, N.J. He can be reached at firstname.lastname@example.org.