Sam Brotman, JD, LLM, MBA August 24, 2014 5 min read

Reporting Requirements for Foreign Assets - Part One

Individual Reporting Requirements for Foreign Assets - Your Tax Return

Here is a summary of the Reporting Requirements for Foreign Assets. Under the law, U.S. citizens, resident aliens, and certain nonresident aliens are required to report worldwide income from all sources including foreign bank and financial accounts. Required reporters must pay taxes on income from these accounts at their individual tax rates. The IRS recognizes that there are many legitimate reasons for U.S. taxpayers to have offshore accounts such as convenience, investing, and to facilitate international banking transactions. However, U.S. taxpayers are prohibited under law from using offshore accounts, including foreign banks, security accounts, and trusts, to avoid paying tax. [1] To fully understand the problem, it is necessary to understand what the reporting requirements for foreign assets are.

Reporting Requirements for Foreign Assets 1 - 1040/1040A – Schedule B

Individuals who meet the requirements set out by the Internal Revenue Service are required to file income tax returns on a yearly basis. This requirement is completed by filing a 1040 or a 1040A. Typically, taxpayers must fill out and attach Schedule B to their income tax return (1040/1040A) if they had any interest or dividends regardless of whether the source was foreign or domestic. If the taxpayer had a foreign account or received a distribution from, created, or contributed to a foreign trust, they are required to complete section III of form B. Section III is comprised of 2 questions (four if you count subparts). These four “simple” questions lead to a world of confusion.

Reporting Requirements for Foreign Assets 2 - Question 7a

The first question, question 7a, requires you to report if you had a financial interest or signature authority over a financial account in a foreign country. The term financial account includes but is not limited to:

  • securities, brokerage accounts
  • savings accounts
  • demand accounts
  • checking accounts
  • deposit accounts
  • time deposit accounts
  • other accounts maintained with a financial institution or other person performing the services of a financial institution.
  • commodity accounts
  • futures accounts
  • options accounts
  • insurance policies with cash value
  • annuities
  • shares in mutual funds or similar pooled funds

Reporting Requirements for Foreign Assets 3 - Question 7a line 2

If you answer yes to the first part of question 7a, you are then asked if you are required to file FinCEN form 114, Report of Foreign Bank and Financial Accounts (FBAR.) A logical person would probably search the IRS’s incredibly well developed website for form 114. This would leave the taxpayer confused. While there are vague references to the form on the IRS site, the form itself is not there because it is not an IRS form. FinCEN is officially known as the Financial Crimes Enforcement Network. It is a separate division of the Department of Treasury. FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.[2] The acronym FBAR stands for Foreign Bank Account Report and is designated as form 114 in the FinCEN system.

 

Have more questions concerning the reporting requirements for foreign assets? Please contact our office directly with any questions.

 

[1]26 U.S. Code § 720126 U.S. Code § 7201

[2]http://www.fincen.gov/about_fincen/wwd/mission.html

 

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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