U.S. persons are required to report to the United States government concerning foreign financial accounts. A “U.S. person” is a citizen or resident of the United States. A resident includes a lawful permanent resident, i.e., a greencard holder, or someone who satisfies the “substantial presence test.” An individual meets the substantial presence test with respect to a calendar year if:
(1) such individual was present in the United States on at least 31 days during the calendar year, and
(2) sum of the number of days on which such individual was present in the United States during the current year and the two preceding calendar years (when multiplied by the applicable multiplier determined under the following table) equals or exceeds 183 days:
|In the case of days in:||The applicable multiplier is:|
|1st preceding year||1/3|
|2nd preceding year||1/6|
There are exceptions to the substantial presence test for foreign government workers, teachers, students, and trainees.
Closer connection exception. The substantial presence test does not apply to an individual for a current taxable year if:
1)such individual is present in the United States on fewer than 183 days during the current year, and
2)it is established that for the current year such individual has a “tax home” in a foreign country and has a closer connection to such foreign country than to the United States.
Required reporting to the U.S. government includes reporting foreign accounts and income therefrom on a U.S. income tax return, and reporting financial accounts on a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). On the income tax side, interest and dividend income and capital gains and losses from foreign financial accounts must be reported on a U.S. income tax return. If a taxpayer meets the filing threshold of Form 8938, Statement of Specified Foreign Financial Assets, for the year, the taxpayer must file Form 8938 with his U.S. income tax return for the year. For a U.S. resident taxpayer, the Form 8938 threshold is an aggregate balance of foreign financial accounts exceeding $75,000 at any time during the year, or exceeding $50,000 on the last day of the year. For a taxpayer who is not a resident of the U.S., the Form 8938 filing threshold is an aggregate balance of foreign financial accounts exceeding $300,000 at any time during the year, or exceeding $200,000 on the last day of the year. These amounts double for a joint U.S. income tax return.
If the taxpayer had foreign mutual funds (personal foreign investment companies, or “PFICs”) at any time during the year, they must be reported on Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, filed with the taxpayer’s U.S. income tax return.
If the taxpayer had an interest in a foreign corporation during the year, he may need to report it on Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, with his U.S. income tax return. Separate posts will examine interests in PFICs and foreign corporations.
An individual must file an FBAR for a calendar year if he had a financial interest in, or signature authority over, foreign financial accounts with an aggregate balance of $10,000 or more at any time during the year.
Periods for which reporting is required. Generally, the statute of limitations on assessment of income tax for a given year is three years, and it runs from the time the tax return for that year is filed. But if a tax return understates tax attributable to—
(1) an understatement of gross income by 25 percent or more on such tax return; or
(2) one or more assets required to be reported on Form 8938, and such understatement of tax exceeds $5,000,
then the assessment statute of limitations with respect to such tax return is six years, running from the time the return is filed. For this purpose, an income tax return filed on early is deemed filed on its due date. The statute of limitations on assessment of a penalty with respect to Form 8938 or 5471 is three years, and it runs from the date the form is filed. The statute of limitations on assessment of the penalty for failure to file an FBAR is six years. It runs from the date the FBAR is due, whether or not it is filed.
If you are noncompliant, you need to become compliant, as soon as possible. Programs are available to mitigate your expense in doing so, but you may avail of such programs only so long as the IRS is unaware of your noncompliance, i.e., your compliance is voluntary. My next post will review such programs.
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