International Reporting Requirements for US Taxpayers

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With the massive growth of the global economy, international trade and taxation have been a hot topic for the government organizations such as the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FINCEN). As global trade grows, so does the reporting and compliance laws of foreign transactions. Government organizations are hoping to gather as much information as possible about the transactions from US taxpayers with non-US persons or businesses.

International reporting forms such as Form 8938, Form 5471, and Form 3520 are required to be filed with the IRS to report ownership of foreign financial assets, foreign corporations, and foreign trusts. These forms can ask for detail information about foreign investments and carry hefty penalties for missed filings of the forms. The IRS fines $10,000 for every missed Form 5471 filing by the taxpayer. Because of the high penalties, it is important to understand all the filing requires before entering into any foreign transactions.

Foreign Bank and Financial Accounts (FBAR)

FINCEN is a government organization with the goal of protecting the financial system from “illicit use, combat money laundering and promote national security.” FINCEN has mandated the filing of FinCEN Form 114, Report of Foreign Bank and Financial Accounts to report US taxpayers foreign bank accounts.

Any United States citizen, corporations (or any other company organized under the laws of the United States), who has a financial interest or signature authority over any foreign financial account with a balance of greater than $10,000 at any time during the calendar year must file a FinCen Form 114 (FBAR).  A financial account can include securities, brokerage, savings, checking, commodity futures, insurance policy with cash value and many other types of accounts.

The FBAR is an informational form that provides information to FinCEN about suspicious foreign banking activity. The form must be completed with identifying information of the foreign financial account owner in addition to the financial institutions name, address and the maximum value of the account during the tax year in US dollars.

Form 8938

The Foreign Account Tax Compliance Act (FATCA) is a US legislation that was aimed to prevent tax evasion by individuals or businesses using offshore investment instruments and non-US financial institutions. As part of FATCA, the Internal Revenue Service requires a filing of Form 8938, Statement of Specified Foreign Financial Assets, for taxpayers with certain foreign financial assets with an aggregate value of $50,000.

Foreign Financial Asset

 A foreign financial asset is defined by the IRS as:

  • Any foreign financial accounts such as bank accounts, mutual funds or other investment funds.
  • Any securities such as stocks or bonds.
  • Any ownership interest in a foreign entity (corporation, partnership or foreign trust). These may require additional filings as well.
  • Any other financial instrument which contains an issuer and a non-US counterparty.

Form 8938 must be filed with the individual (Form 1040), corporate (Form 1120) or partnership (Form 1065) income tax returns.

Form 5471

Generally, any US taxpayers who are officers, directors, or shareholders in foreign corporations are required to file a Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations. The Form 5471 is attached and filed with your income tax return.

At a high level, there are 4 categories of filers that are required to file a Form 5471:

  • If a taxpayer owns at least 10% of a foreign corporation
  • If a taxpayer acquires stock in ownership of over 10%
  • If a taxpayer had control of a foreign corporation of at least 30 days during the tax year
  • If a taxpayer owns stock in a corporation that is considered a controlled foreign corporation (CFC) for at least 30 days during the tax year.

Form 5471 reports financial information of the foreign corporation. This information includes name, address and other identifying information about the foreign corporation. In addition, it requires reporting financial information such as the income statement and balance sheet as well as any intercompany transactions between related corporations and any Subpart F Income.

It’s important to understand the filing requirements of the Form 5471 to comply with the IRS as a $10,000 penalty is imposed for each annual accounting period for which a Form 5471 was not properly filed. Form 5471 is filed with individual, corporate, or partnership income tax returns.

Form 3520

The IRS requires a filing of Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, for any US person with certain foreign trusts or ownership of foreign trusts under the rules of sections 671-679, as well taxpayers who received large gifts or inheritance from foreign persons.

If any of the following applies, a filing requirement for Form 3520 could be triggered:

  • If a taxpayer transferred property to a foreign trust or had a reportable event with a foreign trust.
  • If a taxpayer was the owner of any part of the assets of a foreign trust under the rules of sections 671-679
  • If a taxpayer received a distribution from a foreign trust during the tax year.
  • If a taxpayer received a gift or inheritance of over $100,000 from foreign individuals or estates (or $15,797 received from foreign corporation or foreign partnerships).

The Form 3520 must be completed with detailed information about any transfers to a foreign trust, gratuitous transfers, US ownership information of a foreign trust, and much more information about the value owned or transferred between US persons and foreign trusts. The Form 3520 must be filed by the 15th day of the 4th month following the end of the US person’s tax year. This form is filed directly with the IRS and is not part of the income tax return.

Conclusion

As the reporting requirements increase, it’s important to understand all financial investments and transactions with non-US individuals, companies or trusts. Detailed information is often needed to comply with the reporting requirements. This information can be difficult to gather, especially when dealing with foreign entities. Missed filings of these forms can carry expensive penalties or even prison time when it comes to the FBAR. The international tax specialists at Brunoro Law can ensure all filings are complete and in compliance. Contact us for a free consultation.

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