Do I Report Non-Income Producing Foreign Assets for U.S. Tax

Do I Report Non-Income Producing Foreign Assets for U.S. Tax

Reporting Non-Income Producing Foreign Assets

In most foreign countries, entities are used for two main purposes: the first purpose is to operate a business or trust and the second purpose is for estate planning reasons. For example, one of the most common types of foreign corporations in Latin American countries is the Sociedad Anonima. While this type of structure can be used to operate a business, it is also commonly used to hold real estate for estate transferring purposes. Unfortunately, if the owner(s) of a foreign entity that holds non-income producing real estate are considered U.S. persons, then there may be reporting requirements even though in general foreign real estate is not reportable for FBAR or FATCA.

Income is Not the Deciding Factor

When it comes to international reporting in general, taxpayers must know even if a foreign asset does not generate income, it is still reportable. In other words, even when a taxpayer acquires residential property overseas but purchases that property through a foreign entity such as a foreign trust or corporation, it is still reportable for tax purposes.

International Information Reporting and Common Forms

Even when a person has non-income-producing assets, they may still be reportable on various international reporting forms. For example, when a person has foreign accounts such as bank accounts or investment accounts, they are still reported on the FBAR and Form 8938 – even if they do not generate any income.

Foreign Real Estate May Become Reportable

With foreign real estate, it can get tricky. That is because in general, foreign real estate is not reportable (although the income is reportable). For example, taxpayers will acquire foreign property overseas as a primary home or vacation home and place that home into an entity such as a Sociedad Anonima — even though it is not being used for business purposes. Nevertheless, and especially in situations in which it is a per se corporation, the corporation may now be reportable on Form 5471, 8938, and/or 8621.

Disregard Entity

In some situations in which a person might have placed non-income producing assets into a foreign entity, they may be able to disregard the entity. By disregarding the entity, the taxpayer would report any income associated with Schedule C and the assets on Forms such as the FBAR or Form 8938. But, it is important to note that if in the future these assets do generate income then the tax implications may be different from a U.S. tax perspective.

Per Se Corporation

When a person creates a foreign corporation, sometimes they will not have the opportunity to disregard that corporation, even if they want to. This occurs when the foreign corporation is listed on the per se corporation list. Taxpayers should be cognizant of the various U.S. tax and reporting requirements for per se corporations, especially if the entity is a CFC.

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.