Article Highlights
- The Report of Foreign Bank and Financial Accounts
- Statement of Specified Foreign Financial Assets
- Foreign Rental Property
- Foreign Pensions
- Reporting Receipt of Foreign Gifts or Bequests
- Reporting Ownership or Transactions with Foreign Trusts
- Annual Information Return for Foreign Trust with U.S. Owner
- Ownership or Voting Power in Foreign Corporation
- Tax on Non-Resident Alien Gifts of Property Located in the U.S.
- Unrecognized Foreign Accounts
In an increasingly globalized society, many American taxpayers have financial interests or assets situated outside of the United States. Whether acquired via inheritance, investment, or commercial operations, these foreign assets are subject to special reporting requirements imposed by the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN). Understanding these standards is critical for avoiding significant fines. This article delves into the many forms and thresholds involved in foreign asset reporting, such as the FBAR (FinCEN Form 114), Form 8938, and others, while also noting frequent instances in which people may unwittingly maintain overseas accounts.
FBAR (FinCEN Form 114) - The Report of Foreign Bank and Financial Accounts (FBAR) is an important part of foreign asset reporting. U.S. citizens, residents, and corporations must submit an FBAR if they have a financial interest in or signatory power over overseas bank accounts worth more than $10,000 at any point during the calendar year. The FBAR's goal is to give the United States government with information to prevent financial crimes such as money laundering and tax evasion.
The deadline for submitting the FBAR is April 15, with an automatic extension to October 15 if the original deadline is missed. The FBAR is submitted directly with FinCEN, not as part of an income tax return. Failure to submit the FBAR may result in substantial penalties, ranging from $10,000 for non-willful violations to the greater of $100,000 or 50% of the account amount for willful breaches. These sums are updated for inflation each year, and as of January 25, 2024, they are $16,117 and $161,166 respectively.
Form 8938, Statement of designated overseas Financial Assets, is required under the Foreign Account Tax Compliance Act (FATCA) and must be submitted by U.S. taxpayers with designated overseas financial assets that exceed specific levels. For persons residing in the United States, the barrier is $50,000 on the final day of the tax year or $75,000 at any point throughout the year. For married couples filing jointly, the thresholds are doubled.
Reportable foreign financial assets include bank accounts maintained at a foreign financial institution, stocks or securities issued by a foreign company, and an interest in a foreign corporation, partnership, or trust.
The Form 8938 is included with the taxpayer's income tax return and has the same due date, including extensions. Failure to file may result in a $10,000 penalty, with a 40% accuracy penalty, with extra fines for repeated noncompliance and even criminal prosecution. In certain situations, it may be required to submit both the FBAR and Form 8938.
Foreign Rental Property - While foreign rental properties are not disclosed on the FBAR or Form 8938, any resulting income must be recorded on the taxpayer's US tax return. Furthermore, if the property is housed in a foreign bank account, that account may be required to be declared on the FBAR and Form 8938 if it passes the applicable level.
Foreign pensions may be tricky since they may have varying reporting requirements based on their structure. Foreign pensions that fulfill the asset criterion are typically disclosed on Form 8938. Furthermore, disbursements from overseas pensions are usually taxable and must be disclosed on the taxpayer's income tax returns.
Form 3520 is used to record the receipt of certain foreign gifts or bequests. U.S. citizens must submit this form if they receive gifts or bequests from foreign people in excess of $100,000, or from foreign businesses or partnerships in excess of $20,116 as of 2025 ($19,570 in 2024). Form 3520 is due on the same day as the taxpayer's income tax return, including any extensions. It is submitted separately from your income tax return.
Failure to submit Form 3520 may result in a penalty of 5% of the gift or bequest value for each month it is late, up to a maximum of 25%.
Form 3520 - Reporting Ownership or Transactions with Foreign Trusts - Form 3520 is used to record both foreign gifts and ownership or transactions with foreign trusts. Individuals in the United States who establish, transfer assets to, or receive dividends from a foreign trust must complete this form. Failure to submit carries penalties identical to those for foreign donations, as well as extra penalties for failure to declare distributions.
Form 3520-A - Annual Information Return for Foreign Trust with US Owner - This form is necessary for foreign trusts with US owners. This form must be filed by the trust on an annual basis to give information about its operations and financial state. The due date is March 15, with an extension until September 15. Failure to file may result in a 5% penalty on the trust's gross value.
Form 5471 - Ownership or Voting Power in Foreign business - Individuals in the United States who have specific degrees of ownership or voting power in a foreign business are required to submit Form 5471. This form contains information on the corporation's financial activity and the taxpayer's involvement. The due date is the same as the taxpayer's income tax return, including extensions, and it is filed together with the return. Failure to file may result in significant penalties, with annual fines beginning at $10,000.
Form 709 - Tax on Non-Resident Alien Gifts of Property Located in the United States - This form is used to record gifts of property located in the United States made by nonresident aliens. While this form is not expressly for foreign assets, it is important for US citizens who receive such gifts. The deadline is April 15, and failing to submit may result in fines dependent on the amount of the gift.
Unrecognized international Accounts - Many people may unwittingly have international accounts, such as internet gambling or family accounts in other countries. These accounts may still be subject to reporting obligations if they satisfy the FBAR or Form 8938 limits. It is critical that taxpayers analyze all possible foreign financial interests to guarantee compliance.
Navigating the complicated environment of foreign asset reporting may be difficult, but knowing the criteria and deadlines is critical to avoiding costly fines. U.S. taxpayers with overseas financial interests should seek advice from tax specialists to ensure compliance with all reporting requirements. By being knowledgeable and proactive, taxpayers may efficiently manage their overseas assets and avoid the consequences of noncompliance.
Please contact this office if you have any queries or need help with international reporting obligations. Do not subject oneself to unwarranted punishments.
