Reporting Foreign Income and Assets – What U.S. Citizens and Residents Need to Know

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Ah, the Internal Revenue Service. The good ‘ol IRS. What a notorious and feared organization; something I personally think they pride themselves on. I mean think about it, other than Belgians, who knows the name of Belgium’s tax agency? No one. Who around the world has heard of the IRS. Almost everyone.

My point is, don’t mess with the IRS. Even when you win, you lose due to the high monetary and emotional cost of dealing with them when reporting foreign income and assets.

And nowhere is the IRS harsher than when it comes to reporting foreign income and assets. Not only does failing to properly file international information returns to report foreign income and assets come with draconian penalties, it also generally subjects you to an unlimited statute of limitations—the IRS could audit your entire return and assess penalties 20 years from now!

Most people have become aware of the requirement to report foreign income and assets since the enactment of the Foreign Account Tax Compliance Act (FATCA). The majority are also aware of the requirement to report foreign bank accounts and financials accounts on the FBAR and foreign financial assets on Form 8938 (FATCA).

In my experience, however, most are unaware of all the other international information returns that are required to be filed to report foreign corporations, partnerships, trusts, mutual funds, etc., essential for reporting foreign income and assets.

As explained above, failure to file (or accurately file) these forms come with harsh monetary penalties and, in some cases, an unlimited statute of limitations, highlighting the importance of reporting foreign income and assets correctly.

To help you understand what forms you may be required to file, I have summarized the international information returns U.S. citizens, residents, and business entities may be need file to report their foreign income and assets.

To learn more about these forms, including, who must file them, when then must be filed, how they are filed, and the consequences of not filing them, download our “International Tax Form Filing Guide”.

CLICK HERE TO DOWNLOAD THE GUIDE

Form 114 – Report of Foreign Bank and Financial Accounts (FBAR)

You must file this form to report foreign bank and other financial accounts (e.g., brokerage accounts, cash life insurance, annuities, security deposits, escrow accounts, etc.) if you have a financial interest in or signing authority over the account and the filing criteria are met.

Form 8938 – Foreign Account Tax Compliance Act (FATCA)

You must file this form to report your foreign financial assets if the filing criteria are met. Foreign financial assets generally include the same accounts reported on your FBAR plus interests in foreign entities, loans given to foreigners, and certain foreign insurance policies.

Form 8621 – Foreign Mutual Funds

You must file this form if you are a shareholder in a Passive Foreign Investment Company (PFIC) and the filing criteria are met. Foreign mutual funds are the most common type of PFIC.

Form 5471 – Foreign Corporations

You must file this form if you are a shareholder, director, or officer of a foreign corporation and the filing criteria are met.

Form 926 – Transfers to a Foreign Corporations

You must file this form to report transfers of assets, including cash, to a foreign corporation and the filing criteria are met.

Form 8865 – Foreign Partnerships

You must file this form to report your interest in a foreign partnership or the transfer of assets to a foreign partnership if the filing criteria are met.

Form 8858 – Foreign Disregarded Entities

You must file this form to report your interest in a foreign disregarded entity or foreign branch if the filing criteria are met. 

Form 3520 – Foreign Trusts and Gifts from Nonresidents

You must file this form if you received a distribution from a foreign trust, transferred assets to a foreign trust, were considered the owner of a foreign trust (previously transferred assets to a foreign trust), and the filing criteria are met. Additionally, certain gifts from nonresidents must also be reported.

Form 3520-A – Foreign Trust with a U.S. Owner

You must file this form to report your ownership of a foreign trust (previously transferred assets to a foreign trust) if the filing criteria are met and the form was not filed by the trustee of your trust.

Form 8854 – Expatriation

You must file this form to report your expatriation. In certain situations, you may be required to file this form annually.

Crypto Currency

While not an international tax form, you must report your crypto gains and losses and disclose whether you received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency.

Conclusion

International tax is a complex area of U.S. tax law and is constantly evolving. Staying on top of the changing tax laws and compliance requirements is key to being able to help our clients stay in compliance while minimizing their taxes and reducing their risk of audit.

I think we’re doing a pretty good job too because over the past two decades we’ve had audit rate of under 1% and client retention rate of over 90%.
If we can be of assistance in any way, please don’t hesitate to contact us here.

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