Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.
Offshore Income and Filing Information for Taxpayers with Offshore Accounts
U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources including foreign accounts and pay taxes on income from those accounts at their individual rates.
There are many legitimate reasons for holding offshore accounts, including convenience, investing and to facilitate international transactions. By law, U.S. taxpayers are not permitted to use offshore accounts, such as foreign bank and securities accounts as well as trusts, to avoid paying tax. In most cases, affected taxpayers need to complete and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts and usually requires U.S. citizens to report the country in which each account is located. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds that vary depending on filing status and whether the taxpayer lives abroad. Additional filing requirements apply to those with foreign trusts.
The thresholds for filing Form 8938, in brief, are:
For taxpayers living in the U.S.:
For taxpayers living outside the U.S.:
You satisfy the presence abroad test if you are a U.S. citizen who has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year or a U.S. citizen or resident who is present in a foreign country or countries at least 12 consecutive months that ends in the tax year being reported.
The reporting requirement applies not only to financial accounts but specified foreign financial assets including an interest in a foreign trust, foreign estate, foreign pension plan and foreign deferred compensation plan. Specified foreign assets include foreign financial assets not held by financial institutions such as stock or securities issued by someone that is not a U.S. person, any interest in a foreign entity, and any financial instrument or contract that has an issuer or counterparty that is not a U.S. person.
Example--Fred and Sue own in their own name 1,200 shares of stock in MASi, GmbH, a family-held corporation in Germany. The 1,200 shares are valued at $175,000 and Fred and Sue live in the U.S. They must file Form 8938.Form 8938 is filed with your Form 1040. Thus, any extension for your 1040 applies to Form 8938. The failure-to-file penalty for Form 8938 is $10,000. The penalty rises to $10,000 for each 30-day period you don't report after notification by the IRS. In addition, the statute of limitations for your tax return will remain open until 3 years after the date on which you file Form 8938. You can download Form 8938 or the instructions from the IRS website. See Form 3520 and the instructions for transactions with foreign trusts and receipt of certain foreign gifts.
Separately, taxpayers with foreign accounts whose aggregate value exceeds $10,000 any time during the year must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically through FinCEN's BSA E-Filing System. The FBAR is not filed with a federal tax return and must be filed by June 30 each year. The filing threshold is different. FinCEN Form 114 must be filed if you had a financial interest in or signature authority over a foreign financial account if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. For example, you visit Germany regularly to visit relatives and for convenience you maintain a bank account in Germany that had a balance of $11,000 in August of last year. You must file Form 114.
For both Form 8938 and FinCEN Form 114, failure to file could subject you to criminal penalties.
Check the instructions to both forms and the instructions for Schedule B of Form 1040.
Changes to the Offshore Voluntary Compliance Program
Some years ago the IRS found a significant amount of noncompliance with the filing requirements (including some famous individuals) along with unreported income. To encourage filing, the IRS has had a voluntary disclosure program in effect for several years. Disclosing unfiled forms before the IRS discovers the accounts will result in lower penalties. Note. The IRS now has agreements with a number of foreign countries requiring banks to disclose accounts of U.S. citizens. For many individuals with unreported accounts it may just be a matter of time.
The IRS has announced major changes in its offshore voluntary compliance programs, providing new options to help both taxpayers residing overseas and those residing in the United States. The changes are anticipated to provide thousands of people a new avenue to come into compliance with their U.S. tax obligations.
The changes include an expansion of the streamlined filing compliance procedures announced in 2012 and important modifications to the 2012 Offshore Voluntary Disclosure Program (OVDP). The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was non-willful.
Balanced against the modified programs is the government's ongoing effort to combat the misuse of offshore assets. The IRS, working closely with the U.S. Department of Justice, continues to investigate foreign financial institutions that may have assisted U.S. taxpayers in avoiding their tax filing and payment obligations. In addition, on July 1, the new information reporting regime resulting from the Foreign Account Tax Compliance Act (FATCA) will go into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons. The current Offshore Voluntary Disclosure Program was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and 2009. Since the launch of the first program, more than 45,000 taxpayers have come into compliance voluntarily, paying about $6.5 billion in taxes, interest and penalties.
Streamlined Procedures Expanded
The changes announced today make key expansions in the streamlined procedures to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts.
The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer's response to a "risk" questionnaire.
The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. The changes include:
For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.
Offshore Voluntary Disclosure Program (OVDP) Modified
The changes just announced also make important modifications to the OVDP. The changes include:
Copyright 2014 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 06/20/14