Unit 17 - Foreign Financial Reporting Flashcards
BSA
The bank secrecy act
The law that imposes reporting requirements on foreign financial accounts
FATCA
The foreign account tax compliance act
Law that mandates the reporting of foreign financial assets
What are the different forms used for reporting foreign bank accounts, for an assets, and foreign gifts
FBAR
Form 8938
Schedule B
Form 3520
Form 5471
FBAR
Form 114
Report of foreign bank and financial accounts
Record-keeping – keep a minimum of five years
Does not directly impact tax liability
Form 8938
Statement of specified foreign financial assets
Schedule B - for reporting foreign
Interest in ordinary dividends – part three
Form 3520
Annual return to report transactions with foreign trust and receipt of certain foreign gifts
Form 5471
Information return of US persons with respect to certain foreign corporations
FBAR - where is it filed and how is it enforced?
Filed electronically online through the BSA e-filing system
these forms are filed directly with the financial crimes enforcement network (FinCEN) - a division of the US treasury department
But the IRS is still responsible for enforcement
The IRS is responsible for
- Investigating violations.
- Assessing and collecting penalties.
- Issuing administrative rulings.
A US taxpayer is required to file an FBAR if:
- The person had a financial interest, interest, or signature authority over, at least one financial account located outside of the United States.
- The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported. This threshold is the same for every filing status.
REGARDLESS, IF THE ACCOUNT PRODUCES INCOME OR NOT!!!!!!!!
Disclosure of ownership of any foreign account or an FBAR filing requirement is required on for 1040, schedule B, part three
Even if the taxpayer is not required to file an income tax return – could still be required to file an FBAR
Calculating the greatest aggregate value In an account during the calendar year
First, the owner must determine the greatest value in the foreign countries currency at any time during the year
The accounts are then converted to US currency based on the exchange rate at the end of the calendar year
Signature Authority
The authority of an individual or individuals to control the disposition of assets held in a foreign financial account by direct communication with the bank or other financial institution
FBAR reporting requirements are not determined by ownership of the funds
Foreign financial accounts include the following types of accounts
- Foreign bank accounts - savings, checking, and time deposits
- Foreign securities accounts – brokerage accounts, securities, derivatives, or stock options
- Insurance policies with a cash value – such as a whole life insurance policy.
- Foreign mutual funds or similar pulled funds.
- Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.
FBAR due date
Due by April 15 of the year following the year in which the account holder meets the $10,000 threshold
Within an automatic extension to October 15
There is no requirement or form to request this extension
FBAR filing extensions are rare, even for disaster situations
FBAR minimum age requirement
There is no minimum age requirement for filing an FBAR
The requirement includes minor children
If a child holds $10,000 in a foreign financial account, even if the account is not earning revenues, the child will be required to file their own FBAR
EVEN IF THE CHILD HAS NO FILING REQUIREMENT FOR US
IF THE CHILD CANNOT FILE ON THEIR OWN – PARENT OR GUARDIAN MUST FILE AND SIGN IT FOR THE CHILD
FBAR requirements for US partnerships, corporations, estates, and trust
If they meet the $10,000 threshold – required to file an FBAR
FBAR - spouses
Spouses do not need to file separate FBARs if they complete and sign form 114a, record of authorization to electronically file FBARs
And…
- all reportable financial accounts of the nonfiling spouse are jointly owned with the filing spouse
And
- the filing spouse reports all accounts jointly owned with the nonfiling spouse on a timely filed FBAR.
Otherwise, both spouses must file separately
The e-file system will not allow both spouses signatures on the same electronic form – only the filing spouse signs in the system
Taxpayers don’t submit the form 114a, but they keep it for their records
FBAR penalties
Non-willful failure to file
Willful failure to file
Criminal penalties
FBAR penalty – non-willful
The most common FBAR reporting mistake is simply failing to file
A civil penalty of up to $10,000 per return can be imposed
Not per account
Adjusted for inflation – four 2023 the maximum failure to file penalty for non-willful is $15,611
Limited to 50% of the highest aggregate balance of all unreported foreign financial accounts during the years under examination
FBAR penalty – willful
A willful failure to file could result in the greater of
$100,000 (adjusted for inflation, so for 2023 it is $156,107)
Or
50% of the balance in an unreported for an account per year, for up to six years
FBAR penalty – civil penalties
In addition to the willful failure to file penalties, civil penalties can also be imposed
May include a fine of up to $250,000 and five years in prison for willfully failing to file an FBAR report
And up to $10,000 and five years in prison for knowingly and willfully filing a false report
The following accounts are not classified as foreign financial accounts
Foreign financial accounts owned by a government entity
Foreign financial accounts owned by an international financial institution
Foreign financial accounts maintained on a US military banking facility
Foreign financial reporting – mutual fund
The mutual fund itself is responsible for any foreign financial reporting that is required
The investor does not need to report their ownership in the mutual fund or the holdings of the mutual fund
FBAR - safe deposit box
A safe deposit box at a foreign financial institution is not considered a financial account
However, under the FBAR rules, if gold, bullion, or foreign currency is held inside a foreign financial institution, it is subject to FBAR reporting
Form 3520 – what is it and filing requirement
A US person must file form 3520, annual return to report transactions with foreign trust and receipt of certain foreign gifts…
If they receive gifts or bequests valued at more than $100,000 from a nonresident alien individual or foreign estate
Taxpayer must aggregate gifts received from related parties
The form is due at the same time as the US persons income tax return, including extensions
But the form is filed separately from the income tax return
3520 is considered an information return, not a tax return, and no taxes are assessed on this form because foreign gifts or bequests are not subject to US income tax.
Failure to file form 3520
No penalty applies if the failure to report was due to reasonable cause or not willful neglect
Otherwise, the penalty is equal to 5% of the amount of the foreign gift or bequest for each month for which the failure to report continues
Not to exceed a total of 25%
A foreign gift to a US US person does not include amounts paid for
Qualified tuition or medical payments made on behalf of the US person.
if the payments are made directly to the institution
Specified foreign assets include
- Foreign stock or foreign securities – not held in a US brokerage account.
- Financial accounts maintained by a foreign financial institution.
- Foreign pensions or deferred compensation plans.
- Interest in a foreign estate.
- A partnership interest in a foreign partnership.
- Any interest in a foreign issued insurance contract or annuity with a cash surrender value.
Form 8938 – statement of specified foreign financial assets
Requires the taxpayer to provide detailed financial information about their foreign accounts
Filed with the tax return if the amount of assets exceeds certain thresholds
This is a separate filing requirement, in addition to the FBAR
Form 8938 – failure to file penalty
Failure to report form 8938 on a timely filed return may result in a penalty of $10,000
Taxpayer has 90 days after the mailing of the IRS letter to avoid additional penalties
Then an additional $10,000 penalty may apply to each 30 day period. The form is not filed after the 90 day deadline.
Up to a maximum of $50,000 of additional late filing penalties – resulting in a total penalty max of $60,000
Under payments of tax attributable to nondisclosure foreign financial assets are subject to an additional substantial understatement penalty of 40%
If the form is omitted accidentally – taxpayer should amend their return, including the form 8938 and attach a statement of reasonable cause to avoid penalties
Form 8938 – exclusion
If the taxpayer is not required to file an income tax return for the year
They do not need to file form 8938
Even if the value of specified for an assets is greater than one of the reporting threshold
Form 8938 filing requirement – taxpayers living inside the US
Taxpayer must file the form if the aggregate value of specified foreign financial assets is more than the following reporting threshold:
MFJ - $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
Unmarried and MFS - $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
Form 8938 filing requirement – taxpayers living abroad
Taxpayer must file the form if the aggregate value of specified foreign financial assets is more than the following reporting threshold:
MFJ - $400,000 on the last day of the tax year or more than $600,000 at any time during the year
Unmarried and MFS - $200,000 on the last day of the tax year or more than $300,000 at any time during the year
Form 8938 – financial accounts maintained by a US financial institution or US brokerage firm
Taxpayer does not need to report financial accounts – even if the financial institution or fund invest in foreign stock
Examples of financial accounts maintained by US financial institutions that do not need to be reported include
US mutual fund account
IRA - traditional or Roth
401(k) retirement plans
Qualified US retirement plans
Brokerage and investing accounts maintained by US financial institutions
The following assets are not specified for an assets - do not have to be reported on form 8938
Payments or the rights to receive the foreign equivalent of Social Security, social insurance benefits, or another similar program of a foreign government
Directly held tangible assets, such as art, gold, antiques, jewelry, cars, and other collectibles
Foreign real estate - personal residence or rental property
Foreign currency, if it is directly held and not held in a financial institution
Schedule B - reporting for an account and trust
On part three, schedule B, taxpayer must check yes or no to the question of whether the taxpayer had at any time during the year a financial interest in or signature authority over a financial account - regardless of the filing requirement for the FBAR.
There is no dollar threshold to report for an accounts on schedule B
Schedule B - a foreign financial account includes
Securities
Brokerage
Savings
Checking
Deposit
Time deposit
Commodity futures or options account
insurance policy with a cash value
Annuity policy with a cash value
Shares in a foreign mutual fund
Other accounts maintained within a financial institution
Determining if a bank is considered a foreign bank
A financial account is considered to be located in a foreign country if the account is physically located outside of the United States
Includes accounts maintained with a branch of a US Bank if it is physically located outside the US
Form 5471 – information return of US persons with respect to certain foreign corporation
What is it?
Filing requirements
Penalties
Used to report ownership of a foreign corporation that exceeds a 10% threshold
Includes US citizens and resident aliens, corporations, partnerships, and trusts
Form 5471 is an informational return, not a tax return
But filed along with the tax return . Even if a person is not required to file a tax return, the form 5471 may still be required.
Penalty for not filing is $10,000
If not paid within 90 days of IRS notice – additional $10,000 penalty for each 30 day.
The additional penalty is limited to a maximum of $50,000 for each failure to file
