Foreign Asset Tax & FBAR Reporting Compliance 10-Point Checklist

Foreign Asset Tax & Reporting Compliance

Foreign Asset Tax & Reporting Compliance 

Each year, US Taxpayers across the globe are required to report their international assets, accounts, investments, and income to the US government on their tax return and other international information reporting forms. When it comes to tax returns and foreign money, the international reporting requirements are oftentimes complex and convoluted. The IRS instructions are not typically sufficient to let a Taxpayer know whether or not they have this additional foreign asset or income reporting requirements, such as the FBAR or Form 8938 (FATCA). The Taxpayer may be required to file one or several international information reporting forms in order to be in offshore tax compliance. There are many different factors Taxpayers have to consider in determining whether or not they have a foreign asset reporting or tax requirement in the United States. Here is an introductory 10-point checklist to assist you with determining your foreign asset tax and reporting compliance.

List of Different Accounts and Assets

The first thing Taxpayers have to determine is what types of foreign accounts, assets, and income they have or have had in the past decade or so. It is important to try to recollect as far back as possible and in all of the countries the Taxpayer has resided, worked, or invested in – which can seem like an impossible task, especially when it is hard enough for some people to remember what they had for lunch yesterday. With some countries such as India, this can be infinitely complicated since oftentimes the financial institutions in India will not close the account — but require them to sit there dormant for many years.

Foreign Pension & (Some) Life Insurance Is Reportable

When it comes to international information reporting, it is not limited to just foreign bank and investment accounts. It is important to note that international reporting also includes items such as foreign pension plans and certain foreign life insurance policies as well. One thing to keep in mind is that some of these foreign institutions will not provide all the information necessary, but that does not mean you are not supposed to file the forms or report these assets – you just have to do the best you can with the information available.

Do the Assets Generate Income?

In many different countries, certain foreign investments are not taxable or are tax-exempt at least during the growth phase. This is not always the case for US tax purposes, because even though an account may be tax-exempt abroad, it does not mean it will enjoy the same tax status in the United States. Therefore, when determining how much foreign income was generated, they should consider both taxable and tax-exempt foreign income.

Were Foreign Taxed Paid?

If foreign taxes were paid on the foreign income then typically Taxpayers can receive a foreign tax credit against US taxes due on the same foreign income. The Taxpayer does not always receive full credit, but they will typically receive at least receive a partial credit.

Categorize the Assets & Determine the Values

For each of the assets, the Taxpayer has to determine the USD value by performing an exchange rate calculation. Common exchange rates include the Department of Treasury and IRS average exchange rate.

Which International Reporting Forms are Required?

After the Taxpayer has categorized the assets and determined the different values, the next step is to determine which forms are required. This is the most complicated aspect of reporting because many of these forms are not common and are oftentimes not even included in your typical software programs such as TurboTax. For example, if a person receives a large gift from a foreign person, they are required to file a Form 3520 in order to avoid significant fines and penalties, but this form is not included as part of most common tax software programs.

Due Date of the Forms

Not all international information reporting forms have the same due date. Some forms are due on April 15 and other forms are due in March. Some forms are on automatic extension, while other forms require the Taxpayer to file an extension, and then depending on the form, they may need to file Form 7004 instead of Form 4868.

Perfection Is Not Required

Oftentimes, the Taxpayer is simply unable to obtain all the information necessary for perfect offshore reporting. It could be that the foreign financial institution simply does not maintain all of the information similar to a US bank, or the Taxpayer may have a passbook account that only gets updated when they proactively ask the bank to do so. Moreover, many foreign institutions require the person to appear in person in order to obtain the information, which may not be economically feasible or safe due to Covid outbreaks. Still, the form should be filed the best it can with the information available after conducting a reasonable and diligent search for the data.

Were Prior Year Forms Missed?

If you missed foreign reporting in prior years, you do not want to just start following in the current year going forward. By doing so, this is considered a quiet disclosure and could be subject to extensive fines and penalties. The Internal Revenue Service has developed several offshore amnesty programs which assist Taxpayers with safely getting into compliance. And with some of these programs, there is no penalty – so taking a gamble and making a Quiet Disclosure and getting hit with willfulness penalties as opposed to submitting to the program and receiving a penalty abatement, may not be worth the risk.

Try to Avoid Fear-Mongering

With the recent increase in enforcement and compliance by the US government, comes intense fear-mongering by certain tax practitioners and attorneys. In reality, non-compliance with reporting of foreign accounts and assets is not going to result in a 20-year prison sentence. And, just because it may be easier these days for the IRS to prove willful non-compliance, does not mean your specific facts will lead to a willful violation. It is important to speak with different Board-Certified Tax Specialist Attorneys who specialize exclusively in this area of tax law to get a good lay of the land —  and help you get on the path towards IRS offshore compliance.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax and specifically IRS offshore disclosure.

Contact our firm today for assistance.