The United States imposes reporting obligations upon U.S. persons with respect to their worldwide income and financial assets. The reporting obligations include reporting worldwide income on an annual U.S. income tax return, and reporting foreign financial assets on a Form 8938, Statement of Specified Foreign Financial Assets, filed with a U.S. income tax return. The reporting obligations also include reporting foreign financial assets on an annual FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”).
Who Is a U.S. Person?
“U.S. person” includes (1) a U.S. citizen; (2) a lawful permanent resident of the U.S. (“greencard” holder); and (3) an individual who satisfies the substantial presence test.
The substantial presence test has no foundation in immigration law. It is purely a creature of tax law. An individual meets the substantial presence test with respect to a calendar year if—
(1) The individual was present in the United States for at least 31 days during the calendar year; and
(2) The sum of the number of days on which such individual was present in the United States during the current year and the preceding two 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:|
|The current year||1|
|First preceding year||1/3|
|Second preceding year||1/6|
An individual is present in the U.S. on a given day for this purpose if the individual is physically present in the U.S. at any time during such day.
There are several exceptions to the substantial presence test. An individual is not treated as meeting the substantial presence test with respect to any current year if (1) such individual is present in the U.S. 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.
Individuals exempt from the substantial presence test include certain foreign government-related individuals, teachers or trainees, and students.
U.S. Income Tax Returns
A U.S. person must file an annual Form 1040, U.S. Individual Income Tax Return, reporting the taxpayer’s worldwide income, including income from foreign investment accounts. The foreign tax credit of Internal Revenue Code § 901(a) mitigates U.S. income tax on foreign income.
An individual whose tax home is in a foreign country and who is―
(A) a citizen of the United States and establishes to the satisfaction of the IRS that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period,
can exclude a limited amount of foreign earned income and a housing allowance from U.S. taxable income. Many Americans have accepted overseas assignments in recent years, and the IRS has vigorously contested their claims of a foreign tax home. The resultant body of case law requires a U.S. person to prove domicile in a foreign country with important personal contacts there to establish a foreign tax home—a difficult burden.
A U.S. taxpayer must file with Form 8938, Statement of Specified Foreign Financial Assets, if the taxpayer meets the applicable Form 8938 filing threshold. The taxpayer reports on Form 8938 the taxpayer’s high balance in foreign financial accounts for the year. The Form 8938 filing thresholds are as follows:
Form 8938 Filing Threshold
In United States
Outside United States
|Unmarried or married taxpayer filing separate income tax return||More than $50,000 in foreign financial assets on the last day of the tax year, or more than $75,000 in foreign financial assets at any time during the tax yea||More than $200,000 in foreign financial assets on the last day of the tax year, or more than $300,000 in foreign financial assets at any time during the tax year|
|Married filing joint income tax return||More than $100,000 in foreign financial assets on the last day of the tax year, or more than $150,000 in foreign financial assets at any time during the tax year||More than $400,000 in foreign financial assets on the last day of the tax year, or more than $600,000 in foreign financial assets at any time during the tax year|
To be deemed resident outside the United States for this purpose, the taxpayer must carry the difficult burden of proving a foreign tax home.
Congress countered the use of foreign shell corporations to disguise U.S. persons’ beneficial ownership of foreign financial assets by requiring the filing of Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. While the shell corporation legally, nominally owns foreign financial accounts titled to it, beneficial ownership of such accounts, real ownership of the accounts, the right to beneficial enjoyment of the accounts, is in the U.S. person who owns the stock of the foreign shell corporation.
There are several categories of persons required to file Form 5471. They include a U.S. person who meets the following stock ownership who is an officer, director, or shareholder of a foreign corporation in which a U.S. person has acquired, in one or more transactions, stock meeting the following “10 percent stock ownership requirement” in the foreign corporation. The stock ownership requirement in the foreign corporation means —
(1) Stock representing at least 10 percent of the voting power of value of the stock of the foreign corporation; or
(2) An additional 10 percent of the stock (in voting power or value) of the foreign corporation.
Also required to file a Form 5471 is a U.S. person who acquires (1) stock which, when added to any stock owned on the date of acquisition, meets the 10 percent stock ownership requirement in a foreign corporation, or (2) stock which, without regard to stock already owned on the date of acquisition, meets the 10 percent ownership requirement in the foreign corporation.F
orm 1040 for a given calendar year is due to be filed by the ensuing April 15. The due date of a Form 1040 can be extended by six months, to October 15, by timely filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by the original April 15 due date of the Form 1040. Forms 8938 and 5471 are filed with the taxpayer’s Form 1040 to the tax year.
An FBAR is an annual report of a U.S. person’s interest in foreign financial accounts. A “financial account” means any arrangement wherein one person holds financial assets for the benefit of another. It includes bank accounts and brokerage accounts. It also includes life insurance policies and annuities with a cash value.
A U.S. person must file an FBAR for a given calendar year if the aggregate balance of his or her interest in foreign financial accounts reaches $10,000 at any time during the calendar year. An “interest in a foreign account” for this purpose means either a “financial interest” or signature authority. “Financial interest” means nominal ownership, i.e., the person’s name is on the legal title to the account, or beneficial ownership. “Beneficial ownership” of an account means that the person really owns the assets in the account, and is entitled to beneficial enjoyment of those assets.
For 2015 and earlier years, FBARs were due to be filed by the ensuing June 30th, and could not be extended. FBARs for 2016 and later years are due to be filed by the ensuing April 15th, and they can be extended by six months, to October 15, by an extension application timely filed by the original April 15 due date of the FBAR.
Reporting Obligations of a Non-U.S. Person
Nonresident aliens are required to file an annual Form 1040-NR, U.S. Nonresident Alien Income Tax Return, reporting income or loss from a trade or business operated in the U.S., as well as other U.S.-sourced income, such as interest, dividends, rents, royalties, capital gains, and Social Security benefits. A nonresident alien is an individual who is neither a U.S. citizen nor green card holder, and who does not satisfy the substantial presence test.
If a nonresident alien received wages as an employee in the U.S. during calendar year, then such individual’s Form 1040-NR for that year is due to be filed by the 15th day of the fourth month following the close of the year. Otherwise, Form 1040-NR is due to be filed by the 15th day of the sixth month following the end of the tax year. Form 1040-NR may be extended for six months by filing Form 4868 on or before the due date of the Form 1040-NR.
A nonresident alien is not required to file an FBAR.
Compliance, the Sooner the Better
A great many Americans have foreign financial accounts. Many of them left foreign financial accounts in their native country upon immigrating to the United States, or inherited foreign financial accounts after immigrating to the U.S. They need to comply with U.S. laws concerning their foreign financial accounts, and the sooner they comply the better. If they comply upon immigrating or upon first having foreign financial assets, compliance will be relatively painless. But if they let several years pass without complying, then they may need one of the Internal Revenue Service’s voluntary disclosure programs to comply, incurring substantial amounts of penalties and professional fees in the process.
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