Navigating the Complexities of Reporting Foreign Assets for U.S. Taxpayers

by | Aug 14, 2023

In the globalized world of today, it's not uncommon for individuals and entities to have financial assets spread across numerous countries. If you are a US person with foreign financial assets, it's crucial to understand your reporting obligations to the Internal Revenue Service (IRS). Failure to comply with these regulations can lead to hefty penalties. 

A US person, as defined by the IRS, includes US citizens, resident aliens, domestic partnerships or corporations, estates other than foreign estates, trusts, and persons that are not foreign persons. Foreign persons encompass nonresident aliens, foreign corporations, partnerships, trusts, or estates. Resident aliens are those who pass the IRS's tests for residency.

One of the primary obligations for US persons with foreign assets is filing the Foreign Bank Account Reporting (FBAR). If you have a financial interest or authority over an account located outside the United States, and the total value of your foreign accounts exceeds $10,000 at any point during the tax year, you are required to file an FBAR. This holds even if your foreign financial account hasn't produced taxable income. 

Another critical form for US persons with foreign assets is Form 8938, Statement of Specified Foreign Financial Assets. This form is required if the aggregate value of your foreign financial assets exceeds certain thresholds, which vary based on your filing status and whether you live in the US or abroad. For instance, if you're unmarried and living in the US, you must file Form 8938 if the total value of your foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

It's worth noting that foreign financial assets can come under double taxation, i.e., you may have to pay taxes in both the US and the foreign country where the account is maintained. However, you may be eligible for a credit or itemized deduction for the foreign taxes you accrued, or you may benefit from a tax treaty. 

The IRS has stringent penalties for non-compliance with these reporting obligations. For instance, if you fail to file an FBAR, the penalties can range from a $10,000 fine for non-willful violations to a penalty equal to 50% of the balance in your offshore account or $100,000, whichever is greater, for willful violations. Penalties for not filing Form 8938 can also be substantial.

If you have undisclosed foreign assets, you have several options. These include submitting delinquent FBARs, engaging in streamlined compliance procedures, or participating in the Offshore Voluntary Disclosure Program. Each of these options has its own requirements and potential outcomes, so it's important to seek professional advice before proceeding.

Foreign financial institutions are required by the Foreign Account Tax Compliance Act (FATCA) to report information on accounts held by US taxpayers. This means that even if you don't report your foreign assets, the IRS may still be informed about them.

In conclusion, reporting foreign assets can be a complex process, with various forms to file and thresholds to consider. The penalties for non-compliance are severe, making it important to understand your obligations and to seek professional advice if needed. Whether you're a US citizen living abroad or a resident alien in the US with foreign assets, understanding and complying with these regulations is crucial. We are currently taking on new clients so if you and your business want more information on reporting foreign assets give us a call and schedule a consultation today!