Do you have assets overseas? Bank or savings accounts, brokerage accounts, real estate, companies, gold or other commodities overseas? Can you sign on an overseas account (even if it is not yours)? YOU MAY HAVE A REPORTING OBLIGATION
The U.S. government requires US persons to report their foreign assets and foreign financial assets over which they have signing authority. These rules are very nuanced, so if you have foreign assets, make sure to do some research in order to find out if you have a reporting obligation.
What Foreign Assets are We Talking About?
The U.S. government has a web of filing requirements that include most foreign asset you own and over which you have signing authority. For example:
Form 8938 requires you report your foreign assets (including financial accounts but also other income producing assets). Keep reading for more detail.
FinCEN 114 requires you report foreign financial accounts you own and over which you have signing authority. Keep reading for more detail.
Schedule D in your tax return requires you report any income generated by real estate you hold overseas. See our post [NAME] for more detail.
If you have a foreign entity you must make informational filings about those entities. See our post [NAME] for more detail
What Do you mean by “Have Signature Authority Over?”
You must report any financial accounts that are yours – meaning that the funds are yours. In addition, you must also report any financial accounts on which you have signature authority, even if they are not yours. Common examples of this situation are financial accounts of companies that you sign on (whether or not you own the company) and joint accounts.
FinCEN 114 or FBAR: If you are a US person, you must file an FBAR (FinCEN Form 114) if your foreign financial accounts have at least $10,000 at year-end or at any time during the calendar year. Importantly, your foreign financial accounts are not only those accounts that you own but also those over which you have signature authority (even if you do not own them).
“Financial Account” is a bank or other financial account that includes any checking, saving, brokerage or mutual fund account, as well as any other account that holds any financial asset (read this to include cash, stocks, bonds, other securities, commodities, etc). This reporting is done on a Foreign Bank Accounts Report (FBAR, also known as FinCEN Form 114) filing to be done with the U.S. Treasury.
A “United States person” or “US person” is ANY of the following:
A citizen or resident (as a “green card” holder or otherwise) of the United States.
A domestic partnership.
A domestic corporation.
A domestic estate or trust.
In calculating your foreign financial account balance, the following financial accounts are excluded:
You own or have signing authority over a bank account in a US military financial institution operated by the United States for the purpose of servicing US government operations abroad.
You are an employee or officer of a bank which is under the authority of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, or Office of Thrift Supervision and you have no personal interest in the bank account.
You are an employee or officer of a US domestic corporation that has equity securities listed on a national securities exchange and you have no personal interest in these securities.
You are an employee or officer of a US domestic corporation that has assets which exceed $10M and more than 500 shareholders and you have no personal interest in these assets.
FinCEN Form 114 is filed online on a Foreign Bank Accounts Report (FBAR) with the U.S. Treasury, and not with your tax return. The filing extension for your Federal does not apply to FinCEN Form 114. FinCEN Form 114 must be filed online with the U.S. Treasury on or before June 30 of the following year (although in recent years FinCEN has provided blanket filing extensions).
Form 8938: Depending on your country of residence, filing status, the value of your “Foreign Assets” at year-end and the highest value of your “Foreign Assets” during the year, you may need to file Form 8938 (which you attach to your Federal tax return). Below is a summary of the conditions under which you must file Form 8938:
Country of Residence
Value of Foreign Assets at Year End1
Highest Value of Assets during Year2
At least US$50,000
At least US$75,000
At least US$100,000
At least US$150,000
Outside United States
At least US$200,000
At least US$300,000
Outside United States
At least US$400,000
At least US$600,000
1 Only count the value of assets in all foreign financial accounts you own or have signature authority over
2 Only count the value of assets in all foreign financial accounts you own or have signature authority over
Do note that “Foreign Assets” includes more than your financial accounts. You must report all gains and losses incurred from your assets abroad such as (and in addition to financial accounts) private equity and foreign hedge funds, foreign stock, partnership interests, and any other income-producing asset.
The Elephant in the Room: How Will the US Government Know?
Frequently, we are asked: how will the US government detect failure to report foreign assets? Many US persons have had foreign assets for years without reporting them.
Over the last few years, the US implemented a law called FATCA requiring that foreign financial institutions report bank and other financial accounts of US persons to the IRS. This information is a game changer and the IRS is increasingly able to spot overseas assets of US persons. No more “secret Swiss bank accounts.” Bottom line, the US government is receiving information it never received in the past and it is using it to enforce the rules.
As of December 2018, the US had information sharing agreements with 113 countries including most countries (in South and Central America (including Peru, Chile, Colombia, Brazil and Mexico). Moreover, many foreign financial institutions in countries that have not yet signed information sharing agreements are acting as if their countries have an information sharing agreement in place. See https://www.treasury.gov/resource-center/tax-policy/treaties/pages/fatca.aspx for a complete list of countries with agreements.
Under these information-sharing agreements, foreign financial institutions in those countries must report certain details on accounts held by US persons. Foreign financial institutions will share foreign asset information with the IRS including the name on each bank account, related social security numbers or TINs (Tax Identification Numbers) of the account holders, account numbers, balances (both high balance and end of year balance) and any gross dividends, interest payments or any other financial credits applied to each foreign financial account. If you are a US person and have recently tried to open a bank account overseas, you know the huge amount of information that the bank now requires – it is because of FATCA.
What if I Forgot to Report?
Failure to file FinCEN Form 114 and Form 8938 (as well as other reporting obligations) can lead to stiff penalties, including punitive financial fees and criminal prosecution. Currently, the IRS has made available several tax amnesty programs that can help those that are delinquent in filing. However, one of the key amnesty programs expired in late 2018. The legal costs, interest, and penalties are likely to continue to be more severe in the future. Self-reporting is likely to be treated less severely than detection and enforcement.
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