Foreign Asset Reporting
Foreign Asset Reporting: The reporting of overseas and foreign asset rules are complex. One important aspect of any Streamlined Procedure submission is the disclosure of overseas accounts and assets to the IRS.
Ever since the introduction of FATCA Reporting, the Internal Revenue Service has made foreign accounts and asset compliance, of Offshore Accounts, Foreign Life Insurance and Superannuation reporting such as an Australian Super a key enforcement priority.
This is reflected in the sheer magnitude of offshore penalties for not properly reporting foreign assets. This is also why FBAR and FATCA Amnesty programs such as VDP and Streamlined Filing Procedures were introduced – to give U.S. taxpayers a chance to get into offshore compliance before it is too late.
Let’s review the basics of foreign asset reporting.
Which Foreign Assets are Reported to the IRS?
IRS Foreign Asset Reporting has many facets to it. In order to report foreign assets to the IRS, there are five (5) important requirements:
- Identifying what is a foreign asset
- Assessing the type of asset
- Determining the value of the asset
- Selecting the proper international information reporting form(s)
- Evaluating whether you met the threshold requirements for filing
Identifying what is a Foreign Asset
Just knowing what is actually subject to foreign asset reporting can be a feat in and of itself.
Foreign assets are comprised of many different types of personal and real property. For example, if a person has ownership of foreign stock certificates – these are considered assets.
Other types of foreign assets, include:
- Real Estate
- Business Ownership
- Foreign Life Insurance
- Foreign Investment Funds
- Foreign Pension
Is the Foreign Asset Reportable?
Not all foreign assets are reportable. For example when a person owns a stock certificate, it is reportable– usually on Form 8938. But, if the person also owns foreign real estate, then foreign real estate owned by an individual is not reported.
To keep it confusing, it is important to note that even though individually owned foreign real estate is not reportable, it does become reportable if it is owned in a foreign entity, such as a foreign corporation or (commonly) a Soiceidad Anonima, Hong Kong Ltd., or Australian PVT Ltd.
Determining the Value of the Asset for Reporting
For most international reporting forms, the Internal Revenue Service is usually most interested in the maximum value of the asset during the U.S. tax year; this can become difficult to obtain.
Common situations, include:
- The foreign country is on a different tax year (Australia)
- The account is a Passbook account and values are sporadic (Taiwan)
- The institution did not keep records (Switzerland)
- The institution will not provide documents unless you arrive in person (Asia in general)
- The records are not maintained or the banks are just being difficult (India)
Selecting the Proper International Information Reporting Forms
The IRS has developed many different reporting forms for taxpayers to use for foreign asset reporting.
Some of the more common reporting forms, include:
- Form 3520: Foreign Gifts and Trusts
- Form 3520-AL Foreign Trusts
- Form 5471: Foreign Corporations
- Form 5472: Foreign Owned U.S. Corporations
- Form 8621: Passive Foreign Investment Companies
- Form 8865: Foreign Partnerships
- Form 8938: Specified Foreign Financial Assets
- FinCEN Form 114 (FBAR)
Evaluating Whether you Meet the Threshold Requirements
In order to keep offshore compliance infinitely more confusing, there IRS also developed different threshold requirements for reporting on different forms — depending on the specific form and type of asset being reported.
- FBAR (FinCEN Form 114): Aggregate Annual Total of more than $10,000 in all accounts combined on any day of the year
- FATCA Form 8938: Ranges from $50,000 to $600,000, depending on filing status and U.S. vs. Foreign Residence
- Form 3520: Gift from a Foreign Individual +$100,000; Gift from a Foreign Business $16,388
- PFIC Form 8621: No threshold if excess distributions and certain exceptions apply
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