Keeping on Top of Foreign Information Reporting Requirements – Part II
Written by Eric Swerdlow and Hunter Norton
This is Part II of a two-part series in which we describe many of the most common foreign information reporting returns and forms that taxpayers may be required to file. As noted in Part I of the series, the IRS and the Treasury Department are placing a reviewed emphasis on taxpayer compliance with foreign information reporting requirements. As such, taxpayers need to discuss their foreign business, investment, trust and account interests with their advisors as early as possible in order to comply with these filing requirements.
BSA ELECTRONIC FILING REQUIREMENTS FOR REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS (FINCEN FORM 114):
FinCEN Form 114 (formerly known as Form 90-22.10) is used to report to the United States Treasury a financial interest in or signature authority over a foreign financial account. A financial account for this purpose is generally an account maintained with a financial institution such as a brokerage or banking account; however, the definition is broad enough to encompass other investments such as an insurance policy with a cash value or interests in certain investment funds. A foreign financial account is a financial account located outside the United States. A person can have a financial interest in a foreign financial account by being the owner of record of the account or by holding a greater than 50% interest in a corporation, partnership or trust, which holds a foreign financial account. FinCEN Form 114 must be filed by June 30 (April 15 plus a six month extension for tax years beginning after December 31, 2015) for the previous calendar year; no extensions are available. Penalties for noncompliance can be severe. A civil penalty of $10,000 is applicable for each violation without reasonable cause. In addition, a willful failure to report may be subject to a civil penalty equal to the greater of $100,000 or 50% of the account balance at the time of the violation. Willful violations may also be subject to criminal penalties. We would like to highlight two common situations we have come across in our practice for failure to comply with the FinCEN Form 114 filing requirements: (1) U.S. citizens who live abroad and maintain financial accounts in the country they reside did not believe they had to report these accounts to the U.S. and (2) officers of corporations or partnerships that had signatory power over foreign financial accounts, but had no economic interest in these accounts, were not aware of their FinCEN Form 114 filing requirement.
STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS(FORM 8938):
Pursuant to FATCA (Foreign Account Tax Compliance Act), U.S. individuals are required to file Form 8938 with their U.S. Individual Income Tax Return (Form 1040) to report interests in specified foreign assets above certain threshold amounts (for unmarried taxpayers, more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year; and for married individuals, $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year). Specified foreign assets generally include interests in accounts maintained by a foreign financial institution and interests in foreign stocks and securities, foreign entities and financial instruments issued by a foreign person. The requirement to file Form 8938 is in addition to the requirement to file FinCEN Form 114. Form 8938 is due on the date the U.S. person’s individual tax return is due (including extensions). A $10,000 penalty may apply for a failure to file a complete and correct Form 8938 by the due date.
ANNUAL RETURN TO REPORT TRANSACTIONS WITH FOREIGN TRUSTS AND RECEIPT OF FOREIGN GIFTS (FORM 3520):
Form 3520 must be filed by U.S. persons who:
- Are treated as the owner of any part of a foreign trust
- Have received distributions from a foreign trust
- Have issued an obligation to a foreign trust
- During the tax year create a foreign trust
- Make a gratuitous transfer of property to a foreign trust
- Pass away and are required to include a portion of the trust in their gross estate
- Receive more than $100,000 of gifts or bequests from a nonresident individual or a foreign estate during the tax year
- Receive and report certain gifts from a foreign corporation or a foreign partnership
Form 3520 is generally due on the date the income tax return of the filer is due, including extensions. If Form 3520 is not timely filed, a penalty equal to the greater of: (a) $10,000; (b) 35% of the gross value of any property transferred to the foreign trust; (c) 35% of the gross value of the distributions received or (d) 5% of the gross value of the portion of the trust’s assets treated as owned by a U.S. person may be assessed.
ANNUAL INFORMATION RETURN OF FOREIGN TRUST WITH A U.S. OWNER (FORM 3520-A):
A foreign trust with a U.S. owner is required to file Form 3520-A to provide information about the foreign trust, its U.S. beneficiaries, and its U.S. owners. The U.S. owners of the foreign trust are responsible for ensuring that the foreign trust files Form 3520-A. Form 3520-A must be filed by the 15th day of the third month following the close of the trust’s tax year (March 15 for calendar year trusts) plus an extension that must be requested. Note, this filing deadline does not coincide with the filing deadline for Form 3520, which is due on April 15 for calendar year filers. The penalties for filing a late or incomplete return are the greater of: (a) $10,000 or (b) 5% of the gross portion of the trust treated as owned by a U.S. person at the close of the tax year.
The returns and forms discussed in this blog series are informational in nature and are not used to compute or report a tax liability (with the exception of Form 8621). The filing requirements are complex, and most taxpayers are not aware of their obligation to file, but as discussed above the penalties for failure to file can be both severe and burdensome.
For more information on foreign reporting requirements or our services, please contact us at firstname.lastname@example.org or (212) 245-5900.
Eric Swerdlow, CPA, MST is a Tax Manager who has been with FF&F for 10 years. He specializes in corporate and partnership taxation, with a strong background in consolidated corporations, business planning, provisions for income tax, international operations, foreign tax credits, partnership basis step-up and special allocations, fixed assets, and capitalization. Eric’s focus industries include shipping, transportation, oil and gas services, energy, and manufacturing and wholesale.
Hunter Norton, J.D.L., LL.M., CPA, is an accomplished Tax Director with FF&F. Prior to joining the firm, he spent 7 years as an attorney at Withers Bergman LLP, a tax-oriented law firm, and 8 years in the Tax practice with Deloitte. His areas of expertise include business and investment partnerships, cross-border tax matters, high net worth individuals, and family offices. Hunter’s experienc
e also allows him to advise clients in income tax matters related to trusts, estates and grantors, and taxable gifts, as well as estate planning.