Notes

Do I Need To File Form 8938, “Statement Of Specified Foreign Financial Assets”?
Although it is not illegal to have foreign accounts, the accounts must be disclosed to the IRS on Form 114, Report of Foreign Bank and Financial Accounts and the related income reported on US income tax return. In recent years, the Internal Revenue Service has been aggressively pursuing taxpayers that use undisclosed foreign accounts and foreign entities to avoid or evade tax. Foreign trusts, foreign mutual funds, and foreign life insurance policies constitute just a few examples of the numerous foreign assets which must be reported to the U.S. government. Additional examples include interests in foreign retirement plans, foreign stocks and securities, foreign rental property and offshore businesses.

It is difficult to be “too careful” when disclosing offshore income to the IRS – and conversely, very easy to incur FBAR penalties and many others… for disobeying the law, even inadvertently. In fact, it’s much more likely for U.S. persons with foreign assets to be required to fill out FinCEN Form 114 than those associated with FATCA. deemed paid foreign tax credit calculation The reason is that FinCEN broadly requires compliance from any U.S. persons with financial interests in, or signature authority over, foreign financial accounts with a total value exceeding $10,000 during the calendar year. Taxpayers in either scenario are required to file any amended/missing tax returns for the past three years along with the foreign account reporting forms for the past six years. All taxpayers are must also sign a certification of non-willful conduct.

Taxpayers are required to pay their offshore penalty at the time they submit the application. If two people are joint owners of specified foreign property, they would determine if the $100,000 has been exceeded based on their share of the cost amount of the property. With property such as real estate, it is important to remember that if capital improvements are made to the real estate, thus increasing the cost amount above the $100,000 limit (in Canadian $), then a T1135 will have to be filed.

Failure to file this form could result in a penalty of 10% of the fair market value of the property at the time of transfer. Certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $200,000 ($50,000 if residing in the U.S.) are required to file Form 8938, Statement of Specified Foreign Financial Assets.

Moreover, the entity also has a separate FBAR reporting obligation if the entity is a U.S. U.S. citizens and U.S. residents who transfer assets to a foreign corporation or partnership are required to report the transfer on Form 926, Return by a U.S.

The assets to be reported include foreign bank accounts, financial interest, immovable property, accounts in which individual has signing authority, trusts, any other capital asset held by the individual outside India. Another critical distinction between the Form 8938 and FBAR reporting requirements is that the FBAR regulations attribute interests in foreign financial accounts to U.S. persons who own majority interests in entities owning such accounts.

Separate and apart from the fun of section III of Schedule B of IRS 1040/1040A, is form 8938 which is the Statement of Foreign Financial Assets. U.S. citizens, resident aliens, and certain non-resident aliens that have an interest in specific foreign financial assets and meet the filing thresholds must file this report yearly with their income tax returns. Foreign assets covered by FBAR forms include bank accounts, brokerage accounts, mutual funds, trusts, and other types of foreign financial accounts, even though they may not produce taxable income. Form FinCEN114 requires electronic reporting of foreign bank and financial accounts, and includes such information as the maximum balance in each account each year. Income from accounts is not reported on this form, but on schedule B of the 1040 tax return.

Items like bank accounts, mutual funds, and hedge funds all fall under the FBAR filing requirements, as do certain life insurance policies and funds related to foreign trusts. Failing to disclose these holdings annually could result in an IRS audit or criminal tax and information reporting investigation.

The FBAR reporting requirements can be daunting, especially for practitioners with little international reporting experience. The consequences of noncompliance can be severe for taxpayers and professionally damaging for practitioners.

In general, the filing requirement applies to anyone who had an interest in, or signature or other authority, over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2016. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website. Individuals who meet the requirements set out by the Internal Revenue Service are required to file income tax returns on a yearly basis. Typically, taxpayers must fill out and attach Schedule B to their income tax return (1040/1040A) if they had any interest or dividends regardless of whether the source was foreign or domestic.

bank or securities account, you must report it on FinCEN Form 114, more often known as the FBAR. The only major exception is if the aggregate value of your foreign accounts never exceeds $10,000 during the calendar year. This rule also applies to U.S. entities, so corporations, partnerships, limited liability companies, estates and trusts also should file if the entity owns or has signature authority over such accounts. In addition to filing an FBAR if you maintained foreign financial accounts that totaled more than $10,000 at any point in the calendar year, you must indicate this fact on Form 1040, Schedule B of your income tax return.

If the taxpayer had a foreign account or received a distribution from, created, or contributed to a foreign trust, they are required to complete section III of form B. Keep in mind that you may also be required to file new IRS Form 8938, Statement of Specified Foreign Financial Accounts. The Foreign Account Tax Compliance Act of 2010 created separate and distinct reporting requirements for certain taxpayers holding specified foreign financial assets. Under FBAR, American taxpayers must file an FBAR in every calendar year where the sum of their foreign holdings exceed $10,000 U.S. at any point during the tax year.
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