Revised draft of Form 8938, Statement of Specified Foreign Financial Assets

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The IRS posted a revised draft of Form 8938  (click to download), Statement of Specified Foreign Financial Assets.  What do you think about the new proposed form? Post your comments:

Deadline looms for US citizens to file tax returns and FBAR reports

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Attention! United States persons meaning US citizens residing abroad, dual citizens with the United States, green card holders (Permanent Residents) and US residents for income tax purposes, deadlines are fast approaching for compliance with US reporting and filing obligations. Specifically, for individuals, there are two tax reporting and filings due this month: the Report of Foreign Bank and Financial Accounts (the ‘FBAR’) and the US Individual Income Tax Return.

What is an FBAR? The FBAR is used to report a financial interest in or signature authority over a foreign financial account. The report for the calendar year 2010, although linked to the US Individual Income Tax Return, is not sent to the US Internal Revenue Service. It goes to the US Department of the Treasury and must be received by the Treasury on or before June 30th 2011. Postmarked by June 30th is not acceptable, and note that no extension for later filing is available.

Who Must File an FBAR?

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

A very common misconception is that only one account has to be over $10,000. This is incorrect. It is the aggregate value of all foreign accounts. If the individual has five accounts with $2,000 in each of four, and $3,000 in number five, all accounts must be reported. Foreign financial accounts also mean accounts held jointly with others, such as foreign national spouses, friends, and as guardian for children, etc.

What kind of Financial Account are we talking about?

Foreign Financial Accounts are accounts and financial interests held in Bermuda or other jurisdictions outside the United States by US persons – see description above.

A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures, or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund.

This comprehensive list includes foreign pensions, foreign whole of life insurance policies, foreign annuities, and investment accounts holding foreign mutual funds, foreign money market funds and related type accounts.

What does a Financial Interest mean?

A United States person has a financial interest in a foreign financial account for which:

(1) the United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or

(2) the owner of record or holder of legal title is one of the following:

(a) An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;

(b) A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;

(c) A partnership in which the United States person owns directly or indirectly:

(i) an interest in more than 50 percent of the partnership’s profits or

(ii) an interest in more than 50 percent of the partnership capital;

(d) A trust of which the United States person:

(i) is the trust grantor and

(ii) has an ownership interest in the trust for United States federal tax purposes.

(e) A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or

(f) Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

This is a daunting list of financial interest situations and requires complex research in many instances. Those who may have signatory authority, but no financial interest, are generally assessed more on a case by case basis due to the complex nature of a compound structure.

Why do you have to report these accounts and financial interests?

Most importantly, the FBAR reports are also linked to new reporting requirements under the US Internal Revenue Service initiative and part of the Hire Act legislated by US Congress. The Foreign Account Tax Compliance Act FATCA as it is called placed new and very significant reporting requirements on foreign financial entities (FFE) and non-financial foreign entities (NFFS): your foreign bank, your foreign trustee, your foreign pension administrator, your foreign mutual fund investment provider, your foreign insurance company, your foreign small business private corporation if you own shares and others.

FFEs are required to report all US person’s accounts, balances, transactions, and identifiers to US Internal Revenue Service. Non-cooperation with this mandate by FFEs will trigger an onerous withholding tax penalty on the foreign financial institutions. It is an understatement to say that this new mandate has generated controversy offshore.

These are complex and taxing times for US persons abroad. The discussion above only covers one required form. There are a number of others that are linked to the FBAR that US citizens abroad may have no knowledge of. A good rule to follow is that every time you open/close an account, transfer monies, receive/give gifts, earn, invest, sell/buy an acquisition, die or otherwise implement estate and succession planning, there is a tax consequence.

If you misinterpret IRS instructions, miss deadlines, or inadvertently file incomplete returns, the penalties range from significant to very, very severe. Therefore, it is not recommended, when it comes to US and international tax matters, to rely upon the advice of anyone who does not have an extensive background, license and most importantly competency and experience in US and international tax matters. Well intended friends, foreign brokers, foreign counsel, foreign trustees, foreign pension administrators or even professionals such as CPAs who have had no experience in international tax law practice (they specialized in audit or investments) may not have the expertise to understand current US tax law regarding international tax issues affecting US persons residing abroad.

It is always preferable not to be exposed to significant tax errors or missed tax obligations. If you are audited by US Internal Revenue Service, you may be asked to provide the names of the foreign advisors who provided the advice to you, not a comfortable position to be in.

US Internal Revenue Service has instituted a complex licensing program for tax professionals who advise and prepare US tax returns for compensation. The practitioners are required to take a competency exam, demonstrate tax experience, complete continuing education programs every year, pass a background check (with fingerprints for non-CPA practitioners), be current on all personal individual and related tax reporting and liabilities, and submit to announced office audits by IRS personnel. The Service has implemented severe fines, disbarment from practice before the US Internal Revenue Service, and criminal prosecution for violations of professional conduct and lack of due diligence in conducting a tax practice.

The Internal Revenue Service has made it very clear through various pronouncements, meetings with experienced tax professional groups and in speeches by the Commissioner, Mr. Douglas Shulman, that there will be no relenting of the pressure to bring US persons back into compliance with US tax law.

American Citizens Abroad are aggressively lobbying Congress and various interested representatives on the disincentives of the current US citizenship-based tax system.

This could be a taxing summer for those not in compliance.

By Martha Myron