Foreign Reporting Overview: Expats, Entrepreneurs, and Everyone Else
For expats and entrepreneurs with foreign business interests, additional information returns are required to be filed on tax day. The failure to file some of these foreign information returns can trigger a hefty penalty from the IRS, usually starting at $10,000 per offense. More importantly, failure to file required foreign information returns can leave taxpayers open to audits and assessments long after the standard three-year statute of limitations.
On or about April 15 of every year, U.S. citizens are required file IRS Form 1040 and report their worldwide income regardless of residency. For those living overseas, including resident aliens and active military personnel, the IRS grants an automatic 2-month extension, rendering June 15 "Expat Tax Day." An additional 4-month extension can be filed through October 15, but all expat taxes are due on June 15.
For expats, entrepreneurs, and everyone else with a foreign business interest, additional filings are required on tax day. These forms may include*:
FinCEN Form 114 - Report of Foreign Bank Accounts and Financial Accounts - required to be filed if foreign accounts existed at any time during the year with an aggregate value of $10,000 or more. Failure to file penalty = not to exceed $12,459 (adjusted for inflation) per violation for non-willful violations that are not due to reasonable cause; the greater of $124,588 (adjusted for inflation) or 50 percent of the balance in the account at the time of the violation, for each willful violation.
IRS Form 8938 - Statement of Specified Foreign Financial Assets - required to be filed if foreign assets have aggregate value of more than $50,000 on the last day of the year or $75,000 at any time during the year ($100,000 and $150,000, respectively, for MFJ). Failure to file penalty = $10,000, up to $50,000.
IRS Form 926 - Return by a U.S. Transferor of Property to a Foreign Corporation - required for certain transfers of tangible or intangible property to a foreign corporation. Failure to file penalty = the lesser of $100,000 or 10 percent of the FMV of the property contributed.
IRS Form 8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships** - required for foreign businesses with two or more members (where at least one member does not have limited liability). Failure to file penalty = limited to $100,000.
IRS Form 5471 - Information Return of U.S. Persons With Respect to Certain Foreign Corporations** - required for foreign businesses with one or more members (where all members have limited liability). Failure to file penalty = $10,000, up to to $50,000.
IRS Form 8858 - Information Return of U.S. Persons With Respect to Foreign Disregarded Entities** - required for taxpayers who are sole owners of a foreign business not classified as a corporation. Failure to file penalty = $10,000, up to to $50,000.
The above list of forms is not exhaustive. Other forms include but are not limited to:
8833 (Treaty-Based Return Position Disclosure)
1120-F (U.S. Income Tax Return of a Foreign Corporation)
5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business)
8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund)
3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts)
While the filing requirements for foreign reporting may seem onerous and expensive, the failure to comply can trigger tens to hundreds of thousands in civil penalties. In egregious cases, criminal penalties may apply as well. To add insult to injury, failure to completely comply with foreign reporting requirements can result in an open statute of limitations for individual taxpayers.
If you need to catch up or clear bandwidth for foreign reporting, contact a CPA today. In the words of Benjamin Franklin, "an ounce of prevention is worth a pound of cure."
**In determining whether a foreign business is classified for IRS purposes as a partnership, corporation, or disregarded entity, the "foreign default rule" per IRS Form 8832 (Rev. Dec 2013) clarifies:
A partnership if it has two or more members and at least one member does not have limited liability.
An association taxable as a corporation if all members have limited liability.
Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.