Filing Requirements for Taxpayers with Foreign Holdings

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Discussion
Taxpayers with financial interests in foreign accounts are subject to unique reporting requirements. The reporting was originally created to help the IRS combat tax evasion through offshore accounts. Large punitive penalties are assessed if a taxpayer fails to file either return. Below, I have outlined basic facts about the Report of Foreign Bank and Financial Accounts (FBAR) as well as the Statement of Specified Foreign Financial Assets.

FBAR
Who is required to file?
Taxpayers with an interest in, or signature authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during the year.

When is the return due?
The return is due with the filing of the normal income tax returns.

What is reported?
The form includes basic information about any foreign bank accounts as well as information about the filer.

What are the penalties for failing to file?
Failure to file a FBAR results in a penalty of $10,000 which increases to $100,000 if the failure is found to be willful.

Statement of Specified Foreign Financial Assets
Who is required to file?
Form 8938 must be filed by specified individuals and specified domestic entities with an interest in a specified foreign financial assets with value in excess than the applicable reporting threshold.

Specified individuals include:

1. U.S. citizens;
2. Resident aliens (exceptions apply);
3. Nonresident aliens who elect to be treated as a resident alien for purposes of filing a joint income tax return; and
4. Nonresident aliens who is a bona fide resident of American Samoa or Puerto Rico.

Specified domestic entities include:

1. Closely held domestic corporations with at least 50% of it's gross income from passive sources;
2. Closely held domestic corporations where at least 50% of its assets produce or are held for the production of passive income;
3. Closely held domestic partnerships with at least 50% of its gross income from passive income;
4. Closely held domestic partnerships where at least 50% of its assets produce or are held for the production of passive income; and
5. Domestic trust that has one or more specified persons as a current beneficiaries.

The reporting threshold is as follows:

Taxpayers living inside the United States

1. Unmarried/Married filing separately taxpayers - total value of specified foreign financial assets in excess of $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year; and
2. Married taxpayers - total value of specified foreign financial assets in excess of $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

Taxpayers living outside the United States

1. Unmarried/Married filing separately taxpayers - total value of specified foreign financial assets in excess of $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year; and
2. Married taxpayers - total value of specified foreign financial assets in excess of $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

Specified Domestic Entities

1. Total value of specified foreign financial assets in excess of $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Specified foreign financial assets include:

1. Financial accounts maintained by a foreign financial institution;
2. The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution:
   a) Stock or securities issued by someone that is not a U.S. person (including stock or securities issued by a person organized under the laws of a U.S. possession);
   b) Any interest in a foreign entity; and
   c) Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession).

When is the return due?
The return is due with the filing of the normal income tax returns.

What is reported?
The form includes basic information about any foreign financial accounts as well as information about the filer.

What are the penalties for failing to file?
Failure to file form 8938 results in a penalty of $10,000 which increases by an additional $10,000 for each 30-day period the taxpayer does not file the return up to $50,000.

References
General IRS Filing Requirements - https://www.irs.gov/newsroom/taxpayers-with-foreign-assets-may-have-fbar-and-fatca-filing-requirements-in-june
FBAR Filing Deadline - https://www.journalofaccountancy.com/news/2018/feb/2017-fbar-filing-deadline-201818333.html
Report of Foreign Bank and Financial Accounts (FBAR) - https://www.irs.gov/pub/irs-pdf/f90221.pdf
Statement of Specified Foreign Financial Assets - https://www.irs.gov/pub/irs-pdf/f8938.pdf

Disclosure
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.