Do Expats Living Abroad File FBAR, FATCA, Form 8938 & 3520

Do Expats Living Abroad File FBAR, FATCA, Form 8938 & 3520

Do Expats Living Abroad File FBAR, FATCA, Form 8938 & 3520

When a person is considered a U.S. Person for tax purposes (U.S. Citizen, Lawful Permanent Resident, or Foreign National who meets the Substantial Presence Test), they are still required to file U.S. taxes and file any necessary international informational reporting forms, such as the FBAR, Form 8938 and Form 3520 — and disclose their overseas accounts, assets, and investments to the Internal Revenue Service and FinCEN (unless an exception, exclusion, or limitation applies). Thus, just because a U.S. Person lives abroad and is considered an ‘expat’ does not eliminate their international information reporting requirements. Let’s take a look at some of the key foreign tax forms an expat may have to file when the threshold requirements are met.

Six Important Foreign Account & Asset Reporting Forms 

When a US Person has ownership or other interest in certain foreign accounts, assets, and/or investments, they may have one or several international information returns they are required to file with the Internal Revenue Service each year. Over the past 10+ years especially, the IRS has made overseas account and asset reporting a key enforcement priority. Some of the largest IRS penalties that have been recently assessed and enforced originate from foreign accounts non-compliance on various forms such as the FBAR and Form 8938. There are several different types of international information reporting forms that a US Taxpayer may have to file each year in order to report their foreign asset information to the IRS and FinCEN. Let’s look at six of the most common types of international information reporting forms used to disclose foreign assets, accounts, and investments to the US government:

FBAR (FinCEN Form 114)

One of the most common international reporting forms the Taxpayers are aware of is the annual FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114). This form is more encompassing than some of the other more specific international reporting forms because the FBAR requires the disclosure of several different types of accounts and other assets — such as bank accounts, investment accounts, foreign pensions, and retirement accounts –– along with certain life insurance policies that carry a surrender value/cash value. In addition, the dollar threshold for reporting is relatively low — especially for Taxpayers with accounts in countries with strong currencies, such as GBP.

Form 8938 (FATCA)

One of the newest types of international reporting forms is IRS Form 8938 — which is used to report Specified Foreign Financial Assets to the IRS. The form has been around for about 10 years and is part of the actual tax return so when a Taxpayer submits their annual tax return, Form 8938 is submitted as part of the tax return — unlike the FBAR which is submitted separately, directly, and electronically on the FinCEN website. While there is much overlap between the FBAR and Form 8938, they are not mutually exclusive of each other and both forms may be required in the same year for the same asset. Unlike the FBAR, the form is only required for accounts that a Taxpayer has an actual interest in –– and the threshold for filing will vary based on the Taxpayer’s filing status and whether or not the person resides in the US or abroad.

Form 8621 (PFIC)

Form 8621 is required for US persons to report their interest or ownership in a Passive Foreign Investment Company. The reason why this form is so controversial is that it does not require the Taxpayer to really have ownership of a foreign corporation. As oftentimes is the case, a Taxpayer has ownership of various foreign mutual funds — and this leads them to the Form 8621 filing requirement. If a person does not make certain elections, such as a QEF or MTM, then they become subject to excess distributions which may result in a significantly higher tax rate for income that may otherwise qualify for Long-Term Capital Gain or Qualified Dividend tax treatment.

Form 3520/3520-A

Forms 3520 and 3520-A refer to the reporting of foreign gifts, trusts, and inheritances. In any year that a Taxpayer has ownership of a foreign trust, they are generally required to file both forms. If a Taxpayer merely receives a gift from a foreign person or a foreign trust distribution, then they are required to file Form 3520 to disclose this information. The problem lies in the fact that when a Taxpayer does not timely file this form, the IRS pounces on the Taxpayer (unless they can show reasonable cause and not willful neglect) resulting in a 25% penalty on the value of the gift and/or a substantial penalty on the value of the trust.

Form 5471

Form 5471 is used to report ownership in various foreign corporations. With the introduction of the TCJA, FDII, and GILTI — this form has become infinitely more complicated. When a Taxpayer has ownership of a foreign corporation — even if no income was distributed — and they fall into one of the five (5) categories of filers, then they will have to file Form 5471 along with possibly several schedules. For many US Taxpayers who may simply have an ownership interest in a foreign company owned by family members, the form can be incredibly complicated and burdensome.

Form 8865

Form 8865 is for foreign partnerships and is less common than its Form 5471 counterpart — if only because many foreign entities are classified as foreign corporations for US tax purposes. Form 8865 follows the same concept as Form 5471 — and therefore depending on what categories of filers the Taxpayer falls into (Taxpayer may qualify under multiple different categories of filers), they may have a very comprehensive and detailed reporting requirement.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.