Reporting for U.S. taxpayers about foreign financial assets and accounts
- December 9, 2013
We live in the age of globalization. Businesses are not confined to specific geographic boundaries. Business owners functioning either on a small scale (like the sole proprietor of a costume rental business), or other establishments (like partnerships and corporations) always look for the lower-cost option and can go offshore for this to be more successful. It may make sense to purchase materials or outsource services from outside the United States. It’s likely some of these agreements would be arranged with foreign banks or financial institutions, either in an individual capacity or as a signing authority representative.
Lawmakers are making an effort to make taxpayers worldwide compliant with their income and assets to curb tax evasion. Reporting by U.S. taxpayers for their financial assets and accounts outside the country is among one of these attempts by the U.S. Treasury Department and the U.S. Internal Revenue Service (IRS). Reporting of financial assets outside the United States is covered under the Foreign Account Tax Compliance Act (FATCA), and reporting of financial accounts outside U.S. territories may be required by the Bank Secrecy Act (BSA).
Every business establishment has to file a federal and state tax return. The owners of these companies are also obligated to file their taxes, and if they have international trading with financial associations in other countries, they might need to report under the BSA and/or FATCA. The different filing requirements for financial assets and accounts help such taxpayers get them ready before their 2013 tax returns filing season starts are discussed below.
<b>Reporting on financial assets</b>
FATCA requires certain taxpayers — who are single or file separately from their spouse and live in the United States and hold specified foreign financial assets with an aggregate value of $50,000 or more at the end of the last day of the reporting year (or $75,000 at any time during the year) — to report these assets using Form 8938, attached with the taxpayer’s annual income tax return. Taxpayers who live abroad (filing single or separate from their spouse) are required to file the form if they have more than $200,000 of financial assets at the end of the year (or more than $300,000 at any time during the year). The monetary threshold is double for taxpayers filing jointly with their spouse.
Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons and interest in foreign entities. These assets should not be held for use in trade or business.
As of January 2013, only individuals were required to report their foreign financial assets. At a later time a limited set of domestic entities also may have to report their foreign financial assets, but not for tax years starting before 2013.
Reporting on foreign bank & financial accounts (FBAR)
A U.S. resident who owns a foreign financial account, including bank account, mutual fund, trust, or other financial account, may be required by the BSA to report this to the IRS using Form F-TD-90-22.1. Certain officers or employees with signature or other authority over certain financial accounts are provided filing relief. These exceptions apply only where the officers or employees have no financial interest in the reportable account. Filing requirements have been deferred, with the due date for filing these for taxpayers covered under the exception having been extended to June 30, 2014. It is not relevant whether these accounts are producing any income or not.
Who must file in FBAR
Individuals in the United States are required to file FBAR if:
1. The individual has financial interest or signing authority over financial accounts located outside the United States and
2. The aggregate value of all these accounts exceeds $10,000 anytime during the calendar year under report.
This includes U.S. citizens, U.S residents, entities including, but not limited to, corporations, partnerships or limited liability corporations created or organized in the United States or under the laws of the United States and trusts and estates formed under the laws of the United States.
Filing Form 8938 does not relieve filers of FBAR filing requirements. The Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file Form TD F 90-22.1.These two are different reporting requirements.
Punita Ahuja CPA, FCA, DIRM is managing member of Punita Ahuja CPA PLLC. She is the author of books and is contributing profession related articles. She can be reached at firstname.lastname@example.org