International Tax Form Filing Guide If you have foreign accounts, entities, or assets, chances are that you will be required to file various forms disclosing them. Some of these forms are filed with your tax return and others are filed separately. As with anything our government does, the rules and regulations governing what forms to file and when are complex. This document is meant to give you a general overview of what forms are required to report for: Foreign Accounts, Entities, and Assets. The Treasury Department requires that an FBAR be filed by any U.S. persons with a financial interest in, or signature or other authority over, financial accounts in a foreign country that have a combined value that exceeds $10,000 during a calendar year. Foreign Bank and Financial Accounts (FBAR) (Form TD F 90-22.1) The Treasury Department requires that an FBAR be filed by any U.S. persons with a financial interest in, or signature or other authority over, financial accounts in a foreign country that have a combined value that exceeds $10,000 during a calendar year. This includes bank accounts, brokerage accounts, mutual funds, unit trusts, annuities, and other foreign financial accounts. The reporting obligation applies even if the account produces no taxable income. The key words here are other foreign financial accounts, because these accounts may be difficult to determine. For example, they may include life insurance and annuity policies. It is critical that you have a knowledgeable tax expert to help in the determination of your filing requirements. It is also important to note that the filing requirement obligations extend to the holders of shares of foreign mutual funds or similar pooled funds that are available to the general public and have regular net value determination and regular redemptions. IMPORTANT: The FBAR is not filed with the filer s tax return and no extensions to the filing are granted. It must be received by the Treasury Department on or before June 30th of the following year. Account holders who do not abide by the FBAR filing requirements may be subject to civil or criminal penalties, or both. That said, there are exceptions to the FBAR filing requirements that may apply to your circumstances. It s best that you speak with your tax advisor to discuss these exemptions and find out if they apply to you. Foreign Account Tax Compliance Act (FATCA)(Form 8938) The Foreign Account Tax Compliance Act (FATCA) was included in the Hiring Incentives to Restore Employment Act signed into law on March 18, 2010. It is a farreaching statute aimed to combat offshore tax evasion through offshore accounts by U.S. persons. In simple terms, FATCA requires foreign financial institutions (FFI) to identify to the Internal Revenue Service accounts owned by, or for the benefit of, United States taxpayers. Failure to do so will result in a 30% withholding tax on certain payments to the FFI.
Page 2/7 You must file Form 8938 if: You are a specified individual (U.S. citizen, resident alien, nonresident alien who is a bona fide resident of American Samoa or Puerto Rico) You have an interest in specified foreign financial assets. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you. (see below) Specified foreign financial assets are: Any financial account maintained by a foreign financial institution, unless an exception applies. Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, namely:»» Stock or securities issued by someone other than a U.S. person»» Any interest in a foreign entity, and»» Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person. Form 8938 filing thresholds if you are living in the U.S.: If you are an unmarried taxpayer: You must file if the total value of your specified 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. If you are a married taxpayer filing a joint income tax return: You must file if the total value of your specified 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. If you are a married taxpayer filing separate income tax returns: You must file if the total value of your specified 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. Special Rules for Taxpayers Living Abroad Rarely does the IRS make things easier for taxpayers living abroad, but when it comes to filing Form 8938, they get a little reprieve. You are considered to be living abroad if: You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or
Page 3/7 You are a U.S. citizen or resident who, during a period of 12 consecutive months ending in the tax year, is physically present in a foreign country or countries at least 330 days. Form 8938 filing thresholds if you are living abroad: You are filing a return other than a joint return and the total value of your specified foreign 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; or You are filing a joint return and the value of your specified foreign 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. Foreign Corporations (Form 5471 & 926) The Controlled Foreign Corporation (CFC) rules, including Subpart F, were designed to prevent U.S. citizens, resident individuals, and entities from deferring tax through the use of foreign entities. Prior to these rules, U.S. citizens, resident individuals, and entities could form offshore corporations in tax havens and move income, such as interest, dividends, rent, royalties, and sales and services income, to those subsidiaries where they would either not be taxed or taxed at a very low rate. A CFC is defined as any corporation organized outside the U.S. that is more than 50% owned by U.S. Shareholders. A U.S. shareholder is any individual or entity that owns 10% or more of the foreign corporation. If you are considered a U.S. shareholder you are likely required to file Form 5471 annually as part of your tax return. There are four categories of individuals or U.S. shareholders that may be required to file this form: A U.S. person who is an officer or director of a foreign corporation in which any U.S. person owns or acquires 10% or more of the stock of the foreign corporation. A person who becomes a U.S. person while owning 10% or more of the stock of the foreign corporation. A U.S. person who had control of a foreign corporation for at least 30 days during the accounting year of the corporation.
Page 4/7 A U.S. shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days during the tax year and who owned that stock on the last day of that year. The rules governing CFCs are extremely complex, and the form(s) can be very confusing. Form 5471 requires extensive information, which includes a comprehensive balance sheet and income statement with conversions from foreign currencies to the U.S. dollars using Generally Accepted Accounting Principles (GAAP). Failure to file or an inaccurate filing of Form 5471 can result in substantial penalties with no statute of limitations for audit purposes. In addition to Form 5471, if you transferred property, including cash, to a foreign corporation, you are likely required to file Form 926. Both Forms 5471 and 926 must be filed with and attached to your tax return. Passive Foreign Investment Companies (Form 8621) The IRS defines a Passive Foreign Investment Company (PFIC) as a foreign corporation that meets either a specific asset or income test. Passive income is usually income such as dividends, interest, and rents and royalties. Under the asset test, the foreign corporation will be considered a PFIC if 50% or more of the average value of the foreign corporation s assets are made up of assets that produce passive income. The income test is met if 75% or more of the foreign corporation s gross income is passive income. U.S. persons who are a direct or indirect shareholder of a PFIC may have to file Form 8621. Form 8621 must be attached to the shareholder s tax return and filed with the IRS by the due date (including extensions). Otherwise, there will be a penalty on any deferred income from the foreign investment company. Foreign Partnerships (Form 8865) The IRS defines a foreign partnership as a partnership that is not created or organized in the United States or under the law of the United States or of any state. Certain U.S. partners in a foreign partnership are required to file Form 8865. Below are some circumstances that will trigger the need for filing of Form 8865:
Page 5/7 Control of a foreign partnership by a U.S. person. Control is having greater than a 50% ownership interest. Note: Under the Attribution Rules, the ownership interests of certain other partners could be attributed to partners. For example, one spouse s ownership interest will be attributed to the other spouse and vice versa. 10% or greater ownership interest by a U.S. person, while the foreign partnership is controlled by U.S. persons (more than 50% ownership) each owning at least 10% interests. Contribution of property to a foreign partnership by a U.S. person in exchange for at least 10% of the ownership interests, or if such contribution exceeds $100,000 in value. Acquisition of a foreign partnership interest if that acquisition results in the U.S. person owning 10% or more of the foreign partnership. An increase of a U.S. person s interest in a foreign partnership by 10% or more. Disposition of a foreign partnership interest, if before the disposition the U.S. partner owned a 10% or greater interest in the partnership and after the disposition they owned less than 10%. A decrease of a U.S. person s interest in a foreign partnership by 10% or more. Any reportable event under other 6046A. Foreign Disregarded Entities (Form 8858) A Foreign Disregarded Entity (FDE) is defined by the IRS as an entity that is not created or organized in the United States and that is disregarded as an entity separate from its owner for U.S. income tax purposes. An eligible entity can elect how it will be classified for federal tax purposes. U.S. persons who are owners of FDEs at any time during their taxable year or annual accounting period must file Form 8858 with their tax return as outlined below:
Page 6/7 U.S. persons who are tax owners of FDEs at any time during the taxable year or annual accounting period. U.S. persons who are required to file Form 5471 relating to a Controlled Foreign Corporation (CFC) that is a tax owner of a FDE at any time during the CFC s annual accounting period. Foreign Trusts, Gifts & Bequests (Forms 3520 & 3520-A) Form 3520 U.S. tax law defines a foreign trust as any trust that is not a domestic trust. A domestic trust is any trust where a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. U.S. persons are required to file Form 3520 to report certain transactions with foreign trusts. Form 3520 must be filed if: You are treated as the owner of any of the assets of a foreign trust under the grantor trust rules. The creation a foreign trust has taken place. You have transferred any money or property to a foreign trust (directly or indirectly). You are holding an outstanding qualified obligation of a related foreign trust. You receive a distribution from a foreign trust. Form 3520 must also be filed to report certain foreign gifts and bequests. Reportable gifts are: Gifts or bequests of more than $100,000 from a nonresident alien or foreign estate. Gifts of more than $15,102 from a foreign corporation or partnership. Form 3520-A Foreign trusts with U.S. owners are required to file Form 3520-A on an annual basis.
Page 7/7 It is the U.S. owner s responsibility to ensure that it is filed. A U.S. owner is anyone described in the grantor trust rules. Both Forms 3520 and 3520-A are filed independently of your tax return. Expatriation (Form 8854) Expatriation is the process of relinquishing or renouncing your U.S. citizenship or abandoning your permanent resident status. After meeting with a consular official to renounce or relinquish your citizenship, or abandon your permanent resident status, you must file Form 8854 for the year of expatriation. The requirement is the same for U.S. citizens and long-term residents. It should be noted that once you become an expatriate, you may be treated differently for tax purposes. Tax filing for the year of expatriation is extremely complex and requires the knowledge of a tax professional highly experienced in the matters of expatriation. The form must be filed with and attached to your tax return and filed independently. Conclusion Doing business or holding assets overseas can have tremendous benefits, ranging from tax savings, better asset protection, and more flexible estate planning. However, doing business or holding assets overseas does result in some additional filing requirements that we have outlined above a small price to pay for the many benefits! Failure to comply with these filing requirements or inaccurate filings can result in civil and criminal penalties with no statute of limitations. It is imperative that you have your returns prepared by international tax specialists in order to comply with the law. The forms discussed in this document are very complex, and ordinary tax preparers, accountants, CPAs, and attorneys are generally not competent to prepare them. This publication does not constitute tax, legal, or other advice, and we assume no responsibility with respect to assessing or advising the reader as to tax, legal or other consequences arising from the reader s particular situation. This guide is not intended or written to be used, nor can it be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed by any governmental taxing authority or agency. This publication does not constitute tax, legal, or other advice from Esquire Group, LLC, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal or other consequences arising from the reader s particular situation. This guide is not intended or written to be used, and it cannot be used by the taxpayer for the purpose of avoiding any penalties that may be imposed by any governmental taxing authority or agency. Persons wishing to invest in U.S. real estate should seek professional tax advice for their particular situation.