It’s tax season once again and we take this opportunity to remind readers of important ongoing tax reporting requirements that must be met with respect to foreign financial assets. Whether you have been properly reporting your foreign financial assets to the IRS regularly, or you have recently come into compliance via a Voluntary Disclosure or FBAR submission, you must ensure ongoing tax compliance. And if you’re just beginning to learn about IRS filing requirements for foreign financial assets, you need to know of some filing deadlines that are right around the corner. You’ll have to move fast to report foreign financial assets properly and carefully, or else face yet another tax year of non-compliance.
- “Check the Box” on IRS Form 1040, Schedule B
If you maintained foreign financial account totaling more than $10,000 in the aggregate at any time during 2015, you must “check the box” on your IRS Form 1040, Schedule B, Part III, Line 7. This requirement is applicable to taxpayers who had beneficial ownership of, or signature authority or other authority over, such financial accounts in a foreign country. Even if you closed the accounts during 2015, you must still “check the box” if you maintained the accounts during any part of 2015. If you received a distribution from, or were the grantor of, or a transferor to, a foreign trust or foreign foundation, you must “check the box” on Line 8 and also file form 3520.
- Report Foreign Income
In addition to “checking the box” on IRS Form 1040, beneficial owners of foreign accounts must report all income (including interest, capital gains and dividends) realized during 2015 in the foreign accounts, on IRS Form 1040. If you held investments in foreign mutual funds or hedge funds, you may be required to file additional tax forms applicable to “PFICs” (Passive Foreign Investment Companies) for tax year 2015 (e.g., IRS Form 8621). If you received rental income from foreign real estate or realized gains from the sale of foreign real estate, you must declare it. You may be eligible to deduct real estate expenses and real estate taxes. In many cases, if foreign income was taxed in a foreign country, you may be able to get a credit for foreign taxes paid. Even so, all foreign income should be declared.
- IRS Form 8938
IRS Form 8938, Statement of Specified Foreign Financial Assets, first introduced in 2012, is yet another IRS form to report foreign bank, brokerage accounts and other foreign financial assets (including interests in offshore trusts and corporations, bonds, foreign mutual funds, foreign annuity and insurance policies). IRS Form 8938 is due with your annual tax return (usually April 15, but April 18 this year, unless you obtain an extension).
- Additional Forms for Entities (Foreign Trusts, Corporations, etc.)
If you had an interest in a foreign entity such as a foreign trust or foreign foundation, and/or during 2015 you received assets from such a foreign entity, then you may also be required to file IRS Forms 3520 and 3520A. If you had an interest in a foreign corporation, and such foreign corporation is deemed to be a “Controlled Foreign Corporation” (CFC), then IRS Form 5471 is also due. These forms are usually due with your income tax return (IRS Form 1040, due April 18, 2016).
- The FBAR – due June 30, 2016
The FBAR, Report of Foreign Bank and Financial Accounts (FinCEN Form 114), must be filed by June 30, 2016 for calendar year 2015. The FBAR must be filed by taxpayers who had beneficial ownership of, or signature or other authority over, foreign financial accounts, including bank and securities accounts, if the aggregate value of such accounts exceeded $10,000 at any time during 2015. The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products. Recent authority also extends the FBAR to on-line gambling/gaming accounts. If the accounts existed at any point during 2015, then the FBAR must be submitted by June 30, 2016. Note that the FBAR is now known as FinCEN Form 114, and must now be filed electronically. There are no extensions for the 2015 FBAR, even if you obtain an extension to file your annual income tax returns (e.g. Form 1040).
- Strategic Concerns
If you have not yet filed an application for the OVDP or Streamlined program, or if your application is pending at the IRS, or you are undecided as to whether or not to make a disclosure, you may want to consider requesting an extension for your 2015 tax returns.
You may request an extension by filing IRS Form 4868. Note that this is an extension to file the tax return, not pay tax due. You still need to pay your tax liability by April 18, 2016, while you have until October 17, 2016 to file your tax return.
Note that there are no extensions for your 2016 FBAR form. This means that your voluntary disclosure strategy needs to be formulated prior to reporting to the Government the existence of foreign accounts via the FBAR.
If you have any questions or would like our assistance in formulating a disclosure strategy or in preparing the 2015 FBAR, please feel free to contact us.