Foreign Accounts, Offshore Assets, Ownership of Foreign Companies, Foreign Gifts and Inheritances, or Interests in a Foreign Trust?
It is a common misunderstanding that a person with U.S. citizenship or residency believes foreign accounts, foreign sources of income, and foreign assets do not need to be reported on their U.S. federal tax return. A failure to report such income to the IRS and other U.S. government agencies can result in substantial penalties. With increased enforcement in U.S. federal international tax reporting and compliance, many U.S. individuals are now becoming aware of reporting requirements.
A U.S. individual that owns or has signature authority over a foreign account may be required to disclose the account on the U.S. Foreign Bank Account Report (FBAR), which is filed with U.S. FinCEN. There is a $10,000 civil penalty per year for the non-willful failure to file the FBAR on time. Failure to report foreign account balances to FBAR can carry a penalty of up to $100,000 USD or 50% of the unreported foreign account balance for the intentional failure to file the FBAR. Furthermore, intentional or willful failure to file the FBAR can lead to criminal prosecution and imprisonment.
In addition to the FBAR, U.S. federal Form 8938 Statement of Specified Foreign Financial Assets also discloses ownership of foreign accounts. Form 8938 is required to be filed with a U.S. federal income tax return. Failure to file the form on time will result in a $10,000 USD penalty per year. Beginning for tax years ending on or after December 31, 2015, certain U.S. companies with foreign financial assets must file Form 8938. Previously, only U.S. individuals were required to file Form 8938. There are U.S. Treasury regulations, which now provide the rules regarding Form 8938 filing requirement for U.S. companies.
A U.S. individual may be required to file U.S. federal Form 5471, to report ownership of a foreign corporation, a Form 8865 to report ownership of a foreign partnership, or a Form 8858 to report ownership of a foreign disregarded entity. Failure to file any of these forms on time with a U.S. federal tax return carries a $10,000 USD penalty per year.
A U.S. individual may be required to file U.S. federal Form 3520, to report the receipt of a gift from a nonresident individual or an inheritance from a foreign estate. Failure to report a foreign gift or inheritance could carry a penalty up to 25% of the undisclosed amount.
A U.S. individual may be required to file U.S. federal Form 3520, to report a distribution from a foreign trust or Form 3520-A to report an interest as a U.S. grantor of a foreign grantor trust. Failing to file these forms could result in substantial penalties.
Amnesty programs provided by the IRS are available for U.S. individuals with prior year U.S. international tax reporting delinquencies. Under certain circumstances, the U.S. individual may be able to file the prior year U.S. international reporting forms without penalties.
To avoid penalties, consider working with a qualified U.S. international tax reporting and compliance expert who knows what options are available and can effectively prepare these forms for prior years as necessary. It is advisable to file prior year FBARS and Forms 5471, etc. before filing the current year tax return. Keep in mind that the current year tax return must still be filed on time to avoid penalties. Filing your current return can increase the chances of penalty abatement relief with respect to the prior year filing delinquencies.