Understanding Reporting Obligations for Foreign Assets and Investments
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As the only OECD nation to tax citizens, including an estimated 7 million expatriates, the US imposes taxes regardless of residency. US citizens and resident aliens face the same rules for filing income, estate, and gift tax returns, and paying estimated tax, whether in the US or abroad. Their global income is subject to US taxation, making the 2010 Foreign Account Tax Compliance Act ( FATCA) essential in curbing tax evasion by US taxpayers with offshore assets. However, this complexity often requires specialized tax expertise, which may not be readily accessible abroad. Our experience reveals that US citizens or residents living overseas may be unaware of additional reporting requirements.
Severe penalties accompany noncompliance with these reporting requirements. Taxpayers who have previously failed to adhere to US tax laws may have options to rectify their status with reduced penalties if they meet specific conditions.
The Tax Cuts and Jobs Act (TCJA) introduced significant changes affecting international and domestic businesses, such as deductions, depreciation, expensing, tax credits, and other tax factors. Comparing old and new tax provisions can help taxpayers adapt and plan effectively. Some TCJA provisions impacting individual taxpayers can also affect business taxes. Businesses and self-employed individuals should review tax reform changes for individuals and assess how these provisions apply to their specific situations.
As your Wirtschaftsprüfer und Steuerberater in den USA®, we are prepared to evaluate and advise on your tax needs. Please contact us for support at +49 89 2351 3218 or +1 914 816 1115 after 15h (9 am ET). We’re just a phone call away.
Understanding Reporting Obligations for Foreign Assets and Investments
Foreign Financial Account Reporting (FBAR)
Since the 1970s, reporting obligations for foreign financial accounts have existed, but requirements and penalties have increased in recent years. US taxpayers must disclose their financial interest in, or signature or other authority over, foreign financial accounts if the combined value exceeds $10,000 at any time during a calendar year. Our team of experienced Wirtschaftsprüfer und Steuerberater in den USA® can help you stay in compliance with reporting requirements.
Electronic FBAR Reporting
The report must be filed electronically. The prescribed exchange rate for 2022 is 0.936 EUR / 1 USD ( list of all exchange rates since 2001). FinCEN (Financial Crimes Enforcement Network) has issued detailed FBAR – Electronic Filing Instructions.
For more information about the FBAR, please click on the following links or contact us, your Wirtschaftsprüfer und Steuerberater in den USA®. You can also connect with us easily by phone; +49 89 2351 3218 or +1 914 816 1115 after 15h (9 am ET).
Additional Reporting Requirements by US Taxpayers Holding Foreign Financial Assets (Form 8938)
Taxpayers with specified foreign financial assets exceeding certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR. As your Wirtschaftsprüfer und Steuerberater in den USA®, we can assist you in fulfilling these obligations.
Penalties for inaccurate reporting of offshore transactions can be severe. A summary of potential penalties and a comparison of Form 8938 and FBAR reporting can be found on IRS.gov.
To learn more about Form 8938, please click on the following link or contact us:
Passive Foreign Investment Companies (PFICs)
PFIC rules are among the most complex IRS requirements affecting individual taxpayers. Taxpayers owning interests in PFICs face a significantly higher reporting burden than those owning interests in US-based mutual funds. Unlike US-based funds, foreign investments are not obligated to provide US investors with tax reporting information, placing the responsibility on the shareholder to determine ownership share and tax obligations.
US taxpayers who hold certain types of investments in specific foreign entities generating mostly passive income are required to disclose them. US taxpayers investing in these funds, e.g., foreign funds or ETFs, are taxed even on the undistributed income the foreign investment generates. US taxpayers holding this kind of investment cannot benefit from the potential tax deferral created by a systematic non-distribution of the foreign entity’s income. The PFIC legislation provides options to taxpayers wanting to decrease the burden of this taxing regime.
Our team of qualified Wirtschaftsprüfer und Steuerberater in den USA® can assist you with the IRS requirements you may face. To gain additional insights about PFICs, please click on the following links or
get in touch with us by calling +49 89 2351 3218 or +1 914 816 1115 after 15h (9 am ET).
- Form 8621
- Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- AICPA Passive Foreign Investment Company (PFIC) Checklist
Foreign Pensions and Retirement Accounts
US citizens spending significant time living and working abroad, as well as non-citizens relocating to the US, often possess foreign pensions or retirement accounts. These assets may lead to unexpected tax and reporting obligations. The primary concern when assessing the tax implications of foreign retirement accounts is that most overseas plans are not considered “qualified plans” under IRC 401. This means these accounts typically do not qualify for tax-deferral treatment. In some cases, however, the Double Taxation Treaty and Totalization Agreement may offer relief. To find out if you qualify, contact our knowledgeable team of Wirtschaftsprüfer und Steuerberater in den USA® or visit www.ssa.gov/international.
Taxpayers required to file a US tax return may have to treat employer contributions to the foreign retirement accounts as taxable compensation. Any increase in the account’s value is taxable in the year the growth occurs. Another primary concern is the reporting obligation that ownership of foreign retirement account assets creates. Taxpayers with foreign retirement account interests often must file informational reports, such as FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR), FATCA reporting, and IRS Form 3520.
As your Wirtschaftsprüfer und Steuerberater in den USA® we can help you plan ahead and assist with your reporting obligations. For further details about Foreign Pensions and Retirement Accounts, please reach out to us.
Controlled Foreign Corporations (CFCs): Reporting Requirements for US Shareholders
When a foreign corporation qualifies as a “Controlled Foreign Corporation,” US shareholders who own 10% or more of the total combined voting power of all classes of stock entitled to vote in the corporation must include certain types of the CFC’s income in their US gross income.
If a US shareholder holds more than 50% of the vote or value of a foreign corporation, the company is a CFC. In this case, reporting requirements include filing an annual IRS Form 5471, which is crucial as failure to file can lead to significant penalties, even if no tax is due on the return. The statute of limitations for a tax return with a missing Form 5471 is indefinite, allowing the IRS to examine and assess taxes on items relating to the missing form until it is filed. US shareholders who acquire stock resulting in 10% ownership in any foreign company are also required to file Form 5471.
As your qualified tax advisor, Wirtschaftsprüfer und Steuerberater in den USA® can guide you and assure you stay in compliance with your reporting requirements. To learn more about CFCs and Form 5471, please click on the following links or contact us.
Transnational Tax Information Reporting: A guide
Form 926 – Return by a US Transferor of Property to a Foreign Corporation
Instructions for Form 926
Form 1042S – Foreign Person’s US Source Income Subject to Withholding
Form 1116 – Foreign Tax Credit
Instructions for Form 1116
Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
Instructions for Form 3520
Form 3520-A – Annual Information Return of Foreign Trust With a US Owner
Instructions for Form 3520-A
Form 5471 – Information Return of US Persons With Respect To Certain Foreign Corporations
Instructions for Form 5471
Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
Instructions for Form 8621
Form 8621-A – Return by a Shareholder Making Certain Late Elections To End Treatment as a Passive Foreign Investment Company
Instructions for Form 8621-A
Form 8832 – Entity Classification Election
Form 8854 – Initial and Annual Expatriation Statement
Instructions for Form 8854
W-8 CE, Notice of Expatriation and Waiver of Treaty Benefits
Form 8858 – Information Return of US Persons With Respect To Foreign Disregarded Entities
Instructions for Form 8858
Form 8865 – Return of US Persons With Respect to Certain Foreign Partnerships
Instructions for Form 8865
Form 8938 – Statement of Specified Foreign Financial Assets
Instructions for Form 8938
Report of Foreign Bank and Financial Accounts
Form 8992 – US Shareholder Calculation of Global Intangible Low-Taxed Income
Instructions for Form 8992
Form 8993 – Section 250 Deduction for Foreign-Derived Intangible Income and GILTI
Instructions for Form 8993