By Michael Wu, CPA, CGMA

U.S. persons have legal duty to fully comply with U.S. tax laws which include Foreign Bank Account Reporting (“FBAR”) and other foreign information tax returns. This article will discuss the FBAR and most common foreign tax filing requirements for U.S. individuals as well as the remedies for non-filing.

Who is subject to the FBAR and other foreign tax filing requirements?

All U.S. tax residents are subject to the filing requirements. Tax residents include U.S. citizens, U.S. permanent resident (Greed Card holders), a U.S. person’s non-resident alien spouse who made an election to be treated as a U.S. tax resident, and non-resident aliens who meet the Substantial Presence Test. In general, to meet this test, a non-resident alien must be physically present in the United States (U.S.) on at least:

  1. 31 days during the current year, and
  2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
    • All the days taxpayer was present in the current year, and
    • 1/3 of the days taxpayer was present in the first year before the current year, and
    • 1/6 of the days taxpayer was present in the second year before the current year.

Rev. Proc. 2020-20 provides that an Eligible Individual who intended to leave the U.S. but was unable to do so due to the COVID-19 Emergency Travel Disruptions, may exclude up to 60 calendar days of presence in the U.S. by filing a Form 8843.

Eligible Individual is:

  • Who was not a U.S. resident at the close of the 2019
  • Who is not a permanent resident at any point in 2020
  • Who is present in the U.S. on each of the days of the individual’s COVID-19 Emergency Period (2/1/2020 – 4/1/2020)
  • Who does not become a U.S. resident in 2020 due to days of presence in the U.S. outside of the individual’s COVID-19 Emergency Period

The most common foreign reporting for U.S. individuals:

Report 114 – Foreign Bank Account Reporting

  • Report FBAR to Treasury Department when aggregate highest balance of bank accounts over $10,000
  • All bank account information and highest balance should be reported including signatory authority accounts
  • Penalty for non-willful non-reporting per account = $12,921
  • Penalty for willful failure to file = 50% of aggregate highest balance or $129,210 and up to 10 years of jail time

Form 8938 – Foreign Financial Asset Reporting

  • Governed under FATCA including bank accounts, stock, bonds, loans and insurance
  • Penalty on non-reporting of Form 8938 – $10,000
  • No real property reporting unless there is rental activity or a sale/transaction

Forms 3520 & 3520-A – Foreign Gift and Trust Reporting

  • File Form 3520 when receiving foreign gift over $100,000 per year
  • Penalty on non-reporting of Form 3520 – 5% of gift value per month up to 25% of the gift
  • Penalty on non-reporting of Form 3520-A – greater of $10,000 or 5% of the gross value of trust’s assets treated as owned by the U.S. person

Form 926 & Form 5471 – Foreign Investment and Corporation Reporting

  • File Form 926 when investing 10% of a foreign company
  • Penalty on non-reporting of Form 926 – 10% of capital contribution up to $100,000
  • File Form 5471 to disclose foreign company’s financial information
  • Penalty on non-reporting of Form 5471 – $10,000 for each form, plus additional $10,000 per month up to $60,000 after receiving IRS notice for 90 days

Form 8992 – Foreign Corporation Profit Reporting

  • GILTI = US shareholder’s net CFC tested income – net deemed tangible income return
  • Tested income = CFC’s revenue – subpart F income – ECI – deductions
  • Net deemed tangible income return = 10% of US shareholder’s pro rata share of qualified business asset investment – interest expense
  • Penalty on non-reporting of Form 8992 – $10,000

Form 8621 – Passive Foreign Investment Company Reporting

  • Passive Foreign Investment Company (PFIC) or Qualified Electing Fund (QEF) – 75% of gross income is passive or at least 50% of the company’s assets are investments
  • Often are non-CFC foreign-based investment funds, start-ups and holding companies
  • Penalty on non-filing is $10,000

The followings are the remedies for non-filing of the above forms:

Delinquent International Information Return Submission

  • Taxpayer should file delinquent information returns with a statement of fact to establish reasonable cause for failure to file if meets the following requirements:
    • who has reasonable cause for not timely filing the information returns,
    • are not under a civil examination or a criminal investigation by the IRS
    • have not already been contacted by the IRS about the delinquent information returns
    • No extra taxes due to the non-filing

Delinquent FBAR Submission Procedures

  • Taxpayer can file delinquent FBAR if
    • have not filed a required Report of Foreign Bank and Financial Accounts,
    • are not under a civil examination or a criminal investigation by the IRS, and
    • have not already been contacted by the IRS about the delinquent FBARs
  • No penalty if already properly reported interest income on tax returns and paid tax

IRS Streamlined Filing Procedures

  • Taxpayers must certify that non-filing FBAR was non-willful
  • Non-willful conduct – due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law
  • Penalty – 5% of the highest bank balance for the past 6 years, need to amend 3 years of tax returns
  • No extra penalty for other non-filed Forms

Updated Voluntary Disclosure Practice

  • IRS had 3 separate Offshore Volunteer Disclosure Programs previously; the last one, 2014 OVDP, was closed on 9/28/2018; the IRS issued Updated Voluntary Disclosure Practice on 11/20/2018
  • Taxpayers who did not commit any tax or tax related crimes and do not need the voluntary disclosure practice to seek protection from potential criminal prosecution can continue to correct past mistakes using the 3 procedures
    mentioned above or by filing an amended or past due tax return.
  • A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.
  • A voluntary disclosure occurs when taxpayer provides a truthful, timely, and complete disclosure to Criminal Investigation through designated procedures and file Form 14457.
    It also requires taxpayer to:

    • Cooperate with IRS in determining taxpayer’s correct tax liability and
    • Make good faith arrangements with IRS to pay in full the tax, interest and any applicable penalties taxpayer owes.
  • A disclosure is timely if IRS receive it before it has:
    • Commenced a civil examination or receives criminal investigation
    • Received information from a third party alerting us to taxpayer’s noncompliance
    • Acquired information directly related to taxpayer’s specific noncompliance from a criminal enforcement action (e.g., search warrant, grand jury subpoena, etc.)