Tax compliance and reporting of foreign assets
Each year, US taxpayers around the world 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 reporting and foreign money, international reporting requirements are often complex and convoluted. IRS instructions are generally not sufficient to inform a taxpayer whether or not they have these additional foreign asset or income reporting requirements, such as FBAR or Form 8938 (FATCA). The Taxpayer may be required to file one or more international information declaration forms in order to be in offshore tax compliance. There are many different factors that taxpayers should consider when determining whether or not they have a foreign asset declaration or tax requirement in the United States. Here is an introductory 10-point checklist to help you determine your foreign tax on assets and comply with reporting.
List of different accounts and assets
The first thing taxpayers need to determine is the types of foreign accounts, assets, and income they have or have had over the past decade. It is important to try to remember as far away as possible and in all the countries in which the taxpayer has resided, worked or invested – which may seem like an impossible task, especially when it is already difficult enough for some people to remember what they lunched yesterday. With some countries like India this can be endlessly complicated as often the financial institutions in India will not close the account – but will force them to sit idle for many years.
Foreign pension and (some) life insurance must be declared
When it comes to international reporting, it’s not just limited to 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. One thing to keep in mind is that some of these foreign institutions won’t provide all the necessary information, but that doesn’t mean you’re not supposed to fill out the forms or declare those assets – you just have to do your best. with the information available.
Do the assets generate income?
In many different countries, certain foreign investments are not taxable or are exempt from tax at least during the growth phase. This is not always the case for US tax purposes, because even though an account may be exempt from tax abroad, that does not mean that it will enjoy the same tax status in the United States. Therefore, when determining the amount of foreign income generated, they must consider both taxable and tax-exempt foreign income.
Have foreign taxes been paid?
If foreign taxes have been paid on the foreign income, taxpayers generally qualify for a foreign tax credit on US taxes owing on the same foreign income. The taxpayer does not always receive a full credit, but will generally receive at least a partial credit.
Categorize assets and determine values
For each of the assets, the taxpayer must determine the value in USD by performing an exchange rate calculation. Current exchange rates include the average Treasury Department and IRS exchange rate.
Which international reporting forms are required?
Once the taxpayer has classified the assets and determined the various values, the next step is to determine the forms required. This is the most complicated aspect of filing as many of these forms are not common and often 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 complete a 3520 form to avoid large fines and penalties, but this form is not included in most common tax software. .
Forms due date
Not all international information reporting forms have the same due date. Some forms are due April 15 and others are due in March. Some forms are automatically extended, while others 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
Often the taxpayer is simply unable to obtain all the information needed for a perfect offshore return. The foreign financial institution may simply not keep all the information similar to a U.S. bank, or the taxpayer may have a passbook account that is only updated when they proactively ask the bank to do. Additionally, 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. Nevertheless, the form should be filed as best it can with the information available after doing a reasonable and diligent search of the data.
Have previous year’s forms been omitted?
If you’ve missed foreign reports in previous years, you don’t want to just start following in the current year. Doing so is considered a discreet disclosure and could be subject to heavy fines and penalties. The Internal Revenue Service has developed several offshore amnesty programs that help taxpayers come into compliance safely. And with some of these programs, there’s no penalty – so taking a bet and making a silent disclosure and being hit with voluntary penalties instead of submitting to the program and receiving a penalty reduction, may not be worth the risk.
Try to avoid fear
With the recent increase in enforcement and compliance by the US government, comes an intense fear campaign from some tax practitioners and lawyers. In reality, failure to report foreign accounts and assets will not result in a 20-year prison sentence. And, just because it may be easier these days for the IRS to prove willful noncompliance doesn’t mean your specific facts will lead to a willful violation. It’s important to speak with various board-certified tax attorneys who specialize exclusively in this area of tax law to get a good sense of the terrain – and help put you on the path to offshore IRS compliance. .