Maintaining foreign bank accounts can be tricky, as there are multiple reporting rules that need to be followed. The U.S. government continues to make foreign financial information filings more expansive and complicated. In fact, not filing these forms can result in penalties that may exceed the values of the accounts and, if deemed intentional, potential jail time. So it is critically important to make sure that you are in compliance with the following filing requirements.
Report of Foreign Bank and Financial Accounts (FBAR)
The FBAR is a reporting requirement imposed by the Treasury. Its purpose is to assist the U.S. government in identifying individuals who may be using foreign financial accounts to circumvent U.S. law. The FBAR can be utilized to trace funds used for illicit purposes or to identify unreported income generated from foreign sources.
Any U.S. person who has a financial interest in, or signature authority over, at least one financial account located outside the U.S is required to report the aggregate value of all such accounts if it exceeds $10,000 at any time during the calendar year. For example, if you had $2,000 in Mexico, $4,000 in Bermuda and $4,100 in Canada, you would be required to file an FBAR because the $10,100 aggregate of the accounts exceeds the $10,000 reporting threshold.
A U.S. person is defined as a U.S. citizen, green card holder, or Specified Domestic Entity (corporations, partnerships, LLCs, trusts, and estates). A U.S. person has a financial interest if they are the owner of record, receive the benefit of ownership, or own more than 50 percent of the entity or trust.
Foreign financial accounts include monetary and non-monetary assets if the account is located outside the U.S. This can include bank accounts, investment accounts, insurance and annuity cash values, mutual funds, brokerage accounts, etc.
Specified Foreign Financial Assets (SFFA) Reporting
SFFA reporting was enacted in 2010 and is imposed by the Internal Revenue Service (IRS). It is designed to fight offshore tax evasion and requires the reporting of financial assets held outside the U.S. It is not needed in instances in which an income tax return is not required to be filed.
Specified Domestic Entities (SDE) that meet certain requirements and exceed thresholds were required to start SFFA reporting in 2016. SDEs are closely-held entities that require a specified individual to own 80 percent or more of the total combined voting power or total value of the entity. The rules of attribution apply to the 80 percent ownership threshold. For example, in a family limited partnership, the parents would be deemed owners of the children’s portion of the partnership in arriving at the 80 percent ownership requirement.
The second threshold for an SDE involves passive income; specifically, if more than 50 percent of the gross income is from passive income or more than 50 percent of the assets produce passive income. Passive income includes items such as dividends, interest, rents and royalties, gains from sale of property, etc.
Reporting for the SSFA is slightly different than the FBAR reporting. A taxpayer is required to report if the individual’s or entity’s foreign financial interest exceeds $50,000 at the end of the year or $75,000 at any time during the year. The amounts are greater for married individuals and taxpayers living outside the U.S. A financial interest includes any income, gains, losses, deductions, proceeds, distributions from holdings, or disposing of the asset under SSFA.
In addition to the foreign financial accounts of the FBAR, the SSFA includes interest in a foreign partnership, foreign social security, interest in a foreign entity, and other interests issued by non-US entities or persons.
Navigating foreign reporting requirements can be tricky and the risks for failing to comply can be substantial, so please contact us if you have questions or need assistance.
We will be happy to provide further information relating to this subject. For more information, contact Allison J. Shoemaker, Manager, Tax Strategies at ashoemaker@kmco.com or 215.441.4600.
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