Foreign Account Reporting Forms: 5 Filing Requirements

6 Important Foreign Account & Asset Reporting Forms

Six Important Foreign Account & Asset Reporting Forms 

Individuals who are considered U.S. persons for tax purposes may have several international information reporting requirements to comply with each year to disclose their foreign accounts, assets, investments, income, trusts, and entities to the U.S. government. While many U.S. taxpayers are familiar with the FBAR and Form 8938 (FATCA), there are several other international reporting forms that taxpayers must be aware of when it comes time to report the information to the IRS. For example, taxpayers may file Form 3520 to report the receipt of a large foreign gift, inheritance, or trust distribution. If they have ownership of a foreign trust, they may have to file Form 3520-A and Form 3520 as well. When the taxpayer has ownership of a foreign mutual fund or ETF, they may also have to file IRS Form 8621. In addition to all the different international tax forms that a person may have to file, it is also important to note that not all the forms are due on the same day and the mechanisms required to extend the time to file one form may not be the same as another form — even if the same account or asset is being reported on both forms. Also, the tax implications and calculations for each form may differ extensively. Let’s look at some of the more common international reporting forms along with examples of when taxpayers may have to file the form.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

FBAR

Many situations will warrant the Taxpayer to have to file the FBAR when they are the owner of a bank account, investment account, pension, and/or other accounts.

• • • Example: David has 15 foreign accounts for a total value of $180,000. 12 of the accounts are active and three of the accounts are dormant, with less than a few dollars in each of them. All 15 accounts are reportable on the FBAR.

    • Example: Scott has 27 different mutual funds, but they are all located in a single account under one account number. For purposes of the FBAR, Scott will report the main account number and the total value of all the assets under that account — but for purposes of IRS Form 8621, Scott will report each fund separately.

    • Example: Brian has a foreign pension plan through his prior employer when he lived abroad. He has not made any contributions to the plan in several years (since becoming a U.S. person) and has not yet received any distributions from the pension plan either. The pension plan is still reportable on the FBAR

    • Example: Dianne has seven accounts, but it is the same $200,000 transferred into a new different account every six to eight weeks (in order to take advantage of increasing interest rates). Even though it is the same $200,000 that was transferred to different accounts throughout the year, Dianne must report all seven accounts on the FBAR. That is because the FBAR is not used to report the total amount of money the Taxpayer has, but rather to report the maximum value of each of the different accounts throughout the year.

    • Example: Dustin has 31 accounts of which he is the owner of and has no signature authority accounts. Dustin must identify on the FBAR that he has more than 25 accounts and prepare the supplemental FBAR form for his records.

Form 8938

Form 8938 is filed by U.S. persons who are required to file a tax return in the year that the Form 8938 threshold requirement is met. For purposes of these examples, we are focused on individuals — but entities may have to file Form 8938 as well.

• • • Example: Scott is a U.S. citizen who lives in the United States and has $175,000 in foreign bank accounts. He is required to file a tax return in the current year and therefore may have to file Form 8938 as well.

    • Example: Michelle is a lawful permanent resident who lives overseas and has not made any treaty elections. She has $700,000 in foreign investment accounts. Even though she lives and works overseas — and the accounts are tax compliant overseas — since she is still required to file a U.S. tax return, she may have to file Form 8938.

    • Example: Dean is a lawful permanent resident who lives in a foreign country but made a treaty election to be treated as a non-resident alien (NRA) for tax purposes. Since he is not considered a U.S. person for tax purposes, he is not required to file a Form 1040 and therefore he is not required to file a Form 8938. (He may or may not be required to file the FBAR based on the recent court case of Aroeste).

Form 8621

When it comes to PFIC, one component of filing with the IRS is to report the existence of the account while the other aspect is dealing with the tax implications. Various issues regarding PFIC will help determine what the tax implications may be.

• • • Example: David invested in various foreign mutual funds that are all contained within one single account at a Foreign Financial Institution. The only assets in the investment account are mutual funds and the total value of the funds are $170,000. For FBAR purposes, David will report the single account, but for PFIC/Form 8621 purposes David will report each fund individually.

    • Example: Michelle invests in different ETFs but does not hold the funds in a single account – rather, she owns each fund individually. The total value of the funds is $650,000. Michelle will have to file the FBAR to report each fund individually as well as having to report each fund separately on Form 8621.

    • Example: Peter owns two mutual funds (not in an account) with a combined value of $19,000 and no distributions from the funds. Peter must file the FBAR to report the mutual funds, but is only required to do very limited reporting on Form 8621 because he files as ‘Single’ and is below the $25,000 exception. Noting, there is contradiction between what the regulation requires and what the instructions require for this Form 8621 exception — with many Taxpayers choosing to err on the side of caution by filing the Form 8621 just to complete the very top portion of the form for each fund.

Form 3520

One of the most common scenarios involves when a U.S. person receives a gift or inheritance from a non-resident alien (NRA) that exceeds the threshold for filing:

• • • Example: Dana is a U.S. Citizen but the rest of her family are non-resident aliens who live abroad. Her aunt is very proud that Dana graduated college and gifted her $400,000 to help her purchase a new home. Dana may have to file Form 3520.

    • Example: Devin is a Lawful Permanent Resident who currently attends school in the United States. Devin’s grandma is a non-resident alien who wants to help Devin with expenses — and gifted him $200,000 to help him supplement his expenses. Even if Devin does not use all the money for expenses, his grandma made it clear that the full amount is a gift to Devin. Devin may have to file Form 3520.

    • Example: Denise’s mom is a non-resident alien who wants to gift Denise and her sister each 15% in a foreign business. The value of the shares that Denise receives are $500,000. Even though Denise did not receive money, and the business is located outside of the United States, she may have to file Form 3520.

    • Example: Brenda is a Lawful Permanent Resident who lives in the United States and recently received a $600,000 inheritance from her foreign mother who passed away. The inheritance is comprised of foreign property and assets and have not been transferred to the U.S. Even though no money or assets have been transferred to the United States, Brenda may still have to file Form 3520.

    • Example: Bill is a U.S. Citizen who received a $3,000,000 inheritance when his foreign father passed away. While it is a large sum of money and Bill is not required to pay any taxes on the inheritance, he may have to file Form 3520.

Form 3520-A

When a Taxpayer has ownership of a foreign trust, they may be required to file form 3520 and form 3520-A. The reporting requirements for ownership of a foreign trust are typically more complicated than when a taxpayer files a Form 3520 to report the receipt of a gift or distribution.

• • • Example: Denise is a U.S. Citizen who has non-resident alien family members living abroad. Her sisters — who are all non-resident aliens– decided to form a foreign trust and wanted to include Denise as one of the owners. Now that Denise is an owner of the foreign trust, she is required to report her ownership on form 3520 and 3520-A.

    • Example: Daniel is a Lawful Permanent Resident who recently became a U.S. person in the current year. Now that Daniel is a Lawful Permanent Resident and a U.S. person for tax purposes, his ownership in his foreign trust is now reportable on Form 3520 and 3520-A (U.S. owner of a foreign trust). In other words, even though the only action Daniel took was to become a U.S. person, his previous ownership in a foreign trust that he owned before becoming US person is now reportable.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them. *Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.