Disclosing Foreign Assets: When and What to Report
Overseas Finances Subject to IRS Reporting Requirements
Nowadays, international business is done at the click of a mouse. But while it can be lucrative to invest in a factory or in businesses overseas, the profits that are made and the assets purchased have to be disclosed to the IRS.
Navigating the IRS rules on reporting overseas assets can be tricky. The first tip to keep in mind is that hiring a tax attorney is the best way to get in compliance with the IRS. Working with a tax professional is another way of getting in the IRS’s good graces with your overseas finances.
Reporting your overseas financial assets is now a must. Not only is the IRS taking international tax scofflaws very seriously, more and more nations are entering treaties with the United States where Americans’ overseas financial assets are reported to the U.S. government automatically.
But not all international finances and/or assets need to be reported on IRS Form 8938, or on FinCEN Form 114.
If the total sum of your financial holdings overseas is more than $50,000, the Foreign Account Tax Compliance Act requires you to list them on Form 8938, which can be turned in with a tax return. However, if you’re not required to file a tax return in any given year, then no Form 8938 must be filed, no matter how lucrative the foreign assets are.
Depending on the type of assets, if they exceed $10,000 in any given tax year then they will have to be reported on Form 114, Report of Foreign Bank and Financial Accounts (FBAR). FBAR reporting applies to taxpayers with a financial interest in, or signature authority over, an international financial account.
The differences in the types of assets that need to be reported for FBAR and those for Form 8938 are similar, but differ in multiple ways. Different definitions apply to each reporting instrument.
Accounts held at a foreign branch of a U.S. financial institution need to be reported for FBAR, but not on Form 8938. Foreign stock or securities that aren’t held in a financial account, as well as an interest in a foreign partnership, don’t have to be reported for FBAR purposes, but need to be reported on Form 8938. Foreign hedge funds have to be listed on Form 8938, but not on the FBAR.
If you have mutual fund located overseas, it’ll have to be reported on Form 8938, as well as foreign-issued life insurance, and foreign private equity funds. Stacks of any foreign cash that are owned by a U.S. taxpayer aren’t required to be reported on Form 8938, though. Neither are safe deposit boxes held overseas, either.
There’s a host of nuances, so make sure to work with an experienced tax attorney to make sure you’re compliant. Doing business overseas can be a smart move, but becoming compliant with the IRS for overseas assets and back tax debt is even smarter.