By Yigang Xu, CPA
XU CPA, LLC
Greenville, SC
www.mygreenvillecpa.com

It is not uncommon for many U.S persons (citizens, permanent residents, and certain resident aliens) to have interest in a foreign bank account, to be beneficiaries or grantors of foreign trusts, or to receive gift and money from a foreign relative or other foreign person. Although these events of themselves are generally non-taxable, but the drastic increase in IRS filing and reporting requirements for these events in the recent years have made penalties for non-compliance or failure to report very substantial for any taxpayer affected.

Although many taxpayers do understand the importance of proper treatment and reporting of taxable events to the IRS, but oftentimes, taxpayers are totally unaware of the existence of those information-only forms and reporting that are strictly required by the IRS, and most importantly, the high penalties of failure to report that the IRS may impose.

Now let us look at some of the most common scenarios:

One. FBAR (Report of Foreign Bank and Financial Accounts), Form TDF 90-22.1
John is a German citizen working and living in the U.S. with his family as permanent residents, his parent is still in Germany, and he has a few active bank accounts in Germany with around Euro 20,000 in the bank.

Forms needed to file: Form TDF 90-22.1
Why: John is a U.S person who has bank accounts under his name in Germany, and the aggregate value of these accounts exceeds $10,000 during the reporting year.
When to file: June 30 of the year immediately following the calendar year being reported, cannot be extended.
Penalty for non-compliance: less than $10,000, maybe abated if there is reasonable cause. Greater of $100,000 or 50% of the account balance if violation deemed willful.

Please note, not only does a financial interest (ownership) in a foreign bank account satisfy the reporting requirement, a signature authority also may satisfy the reporting requirement.

Two. Statement of Specified Foreign Financial Assets, Form 8938
Li is a Korean citizen and businessman recently immigrated to the U.S with his family as permanent residents, he let his brother to manage most of his businesses in Korea, but he still has bank accounts, stocks and other assets left in Korea. One of his saving account is always greater than $200,000 throughout the year.

Forms needed to file: Form 8938 (TDF 90-22.1 is also required)
Why: Li is a U.S person and one of his bank account exceeds $150,000 throughout the year.
When to file: due with his regular individual tax return, can be extended.
Penalty for non-compliance: $10,000 initial penalty, with additional $10,000 for every 30-days following the failure to file, (not to exceeds $50,000)

Three. Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, Form 3520
Jack is a Chinese citizen working and living in the U.S. with his family as permanent residents, he is the only child of his parent who are still in China. His parents love him very much and decide to give him their saving of $150,000 as a gift for Jack to buy a house. Jack’s father wired the money to Jack’s U.S bank account, and Jack used that fund as down payment for his house.

Forms needed to file: Form 3520
Why: Jack received gift from his father in China that is greater than $100,000
When to file: due with his regular individual tax return, can be extended.
Penalty for non-compliance: Greater of $10,000 or 35% of the gift received, additional penalties may also be imposed if failure to file is not corrected.

Foreign gift is not subject to income tax, so in Jack’s scenario this reporting requirement to file Form 3520 is easily ignored, which carries a penalty that is too heavy to be ignored.

Summary:
With the recent increase in foreign account, assets and gift related reporting requirement, taxpayers need to increase their awareness of some basic IRS rules, and let their tax advisors, preparers or attorneys be informed of the existence of these events or facts, so that all the required returns are filed timely and all the implications assessed.

Thanks for reading.

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Disclaimer: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.