There’s no doubt that the world has grown much smaller in recent decades. The internet has made it easier than ever to open accounts in foreign countries and to invest in various activities outside the US. With this greater investment flexibility comes greater reporting responsibility. You should be prepared for your tax return work. Here are some helpful guidelines:
If you have an ownership interest in or signature authority over a financial account (bank account, brokerage account, etc.) located in a foreign country, there is a simple checkbox on Form 1040, Schedule B which must be properly answered Yes. It is merely a disclosure of the existence of such an account or accounts. No additional tax is triggered by making this disclosure, however, failure to disclose is subject to penalty. There is no minimum balance threshold for this disclosure. A foreign bank account, open at any time during the year, holding the equivalent of $1 requires this box to be checked Yes.
If the maximum amount in all such foreign accounts is $10,000 or more, the accounts and their maximum balances must be disclosed in a separate filing, FinCEN 114. Note that if a single account with, say, the equivalent of $6,500 was transferred in full to a different account, this would trigger the FinCEN 114 filing, as the maximum amount in each of those two accounts, when added together, would have converted to $13,000. Again, like the checkbox on Form 1040, Schedule B, the FinCEN 114 is merely a disclosure form, and does not impose any type of tax on these assets; however, failure to file a FinCEN 114 when one should have been filed is subject to substantial penalty.
Another often overlooked source of foreign disclosure is an interest in a foreign investment (partnership, individual stock holding, income producing property). No matter the value of these assets, they must be properly disclosed on Form 8938.
A vacation home in a foreign country is not a foreign financial asset, and unless used as a rental activity, is not subject to reporting.
Don’t confuse foreign investments with stock traded on a foreign exchange but held in a US brokerage account (such as British ADRs). As the US brokerage account will be reporting to the IRS, there is generally no need to report these holdings separately. For the purposes of foreign disclosure, we are discussing assets held in a foreign country which would not otherwise be reported to the IRS or to FinCEN (Financial Crimes Enforcement Network).
This is another area where self-prepared returns using consumer software can fall far short of providing the guidance necessary to properly handle the situation. Only a qualified tax professional has the knowledge and skill to successfully guide you through these issues. When handled properly, in a timely manner, these are usually relatively simple filings. The key is being forthcoming with your tax advisor, and heeding his or her advice and recommendations.
Need to contact us before tax season to get some of these issues straight? Please feel free.