By Michael Bohigian, CPA
As if domestic taxes weren’t challenging enough, foreign tax issues can lead a taxpayer down many complicated paths. Here is a quick overview of four of the major reporting requirements and thresholds for taxpayers with foreign accounts:
Schedule B Questions:
Anyone who has either a financial interest or signature authority in a foreign account needs to be careful to check the boxes on the bottom of the Schedule B which is submitted to the IRS as part of one’s personal income tax return. This requirement applies no matter how small the balance in the applicable foreign accounts.
The form asks these two questions:
- At any time during the year, did you have a financial interest or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?
- During the year, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If “Yes,” you may have to file Form 3520.
Foreign Accounts over $10K
If you have foreign financial account(s) with an aggregate value exceeding $10,000 at any time during the calendar year, you need to file a Foreign Bank Account Reporting, or FBAR for short, enumerating your foreign accounts and the maximum value in each account. This is an information-only return; no tax is due for merely owning foreign assets. (US taxes are owed on any income earned within these accounts.)
Due Date and Filing: The 2015 deadline just passed, with a June 30 deadline and no extension. If you haven’t filed an FBAR for 2015 yet, please do so right away. Penalties for a failure to file can be steep. Starting next year (for 2016), the FBAR due date will mirror the due date of your 1040, with an April 15th deadline and an extension that allows you to file until October 15
Foreign Assets over $50k
The IRS imposes another filing requirement – a Form 8938 – for single US taxpayers who have foreign assets with a value exceeding $50k at the end of the year (or $75k at any time of the year). The reporting threshold is doubled for Married Filing Jointly to $100k on the last day of the year (or $150k at any time of the year). Higher thresholds apply to US taxpayers living abroad.
Similar to the FBAR, the Form 8938 is an information-only filing.
Due Date and Filing: The Form 8938 is filed as part of your 1040, with a deadline of April 15, or October 15 if extended. Please refer to theInstructions of the Form 8938 for more info.
Receipt of Foreign Gifts in Excess of $100k
Generally, a recipient of a gift has no obligation to report on or pay a tax due for receiving a gift. However, if you receive a gift from a nonresident alien, a foreign estate, a foreign partnership, or a foreign corporation, you may need to file a Form 3520, an Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.
The Form 3520 is another informational return with no tax due. It is required for gifts or bequests valued at more than $100k from a nonresident alien or foreign estate, or gifts valued at more than $15,601 for 2015 (adjusted for inflation) from foreign corporations or foreign partnerships. While there are no taxes due with this form, the Failure to File penalties can be substantial.
Due Date and Filing: The Form 3520 is filed separately from the 1040 but has the same deadline of April 15, or October 15 if extended. Please refer to the Instructions of the Form 3520 for more info.
Follow These Rules
The federal government has really focused on making sure taxpayers comply with these filing requirements. Please determine which rules apply to you and what steps you need to take on an continual basis to comply with those rules.