After decades of hard work, Miami has successfully established itself as an international hub. This has been a boom for our local economy, increasing trade from countries in the Caribbean, Latin America, Asia and Europe. We’ve attracted multinational companies looking to grow their business in the U.S. as well as become the base of operations for American businesses’ operations in Latin America. We’ve also drawn industrious entrepreneurs from across the world looking to build their own American Dream.
On the flip side, this is also why Miami is home to one of the largest (and fastest-growing) IRS offices focused on foreign compliance. In fact, after several discussions with local IRS agents, it seems that the IRS cannot hire agents fast enough to keep up with the international compliance and identity theft investigations divisions.
In large part, this is due to the implementation of the Foreign Account Tax Compliance Act (FATCA) of 2010. FATCA is a significant development in the IRS’ efforts to combat tax evasion through U.S. taxpayers holding investments in offshore accounts. Due to FATCA, certain U.S. taxpayers are required to report financial assets held outside of the United States to the IRS (a key point is that this is for disclosure and does not yield a new tax).
It’s important to note that this is not just important for U.S. citizens that own foreign assets, but any U.S. resident that pays taxes here needs to disclose their foreign assets. There is a common misconception in regarding when a new U.S. resident’s ‘Tax’ residence starts versus when their ‘Legal’ immigration-related residence is effective. There is an oft-cited 180 day test for ‘Tax’ residency, but few know about the Three-Year Look-back test the IRS uses to determine ‘Tax’ residence. If any U.S. taxpayer doesn’t report their foreign financial assets, big penalties (at best) may apply.
According to the IRS, a specified foreign financial asset is:
1. Any financial account maintained by a foreign financial institution. This does not include a U.S. payer (for example: a U.S. domestic financial institution), the foreign branch of a U.S. financial institution, or the U.S. branch of a foreign financial institution.
2. Other financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely:
a. Stock or securities issued by someone other than a U.S. person
b. Any interest in a foreign entity
c. Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person
As you may have seen with the drama unfolding in regards to Swiss Banks, FATCA also requires foreign financial institutions to report certain information about accounts held by U.S. taxpayers. This includes any foreign entities where a U.S. taxpayer maintains a substantial ownership interest.
The penalties for not complying with FATCA are very high; a taxpayer can be exposed to hundreds of thousands of dollars of penalties for non-disclosure and possibly criminal actions. Fortunately, the IRS has worked hard to make it as simple as possible to comply.
There is a special Offshore Voluntary Disclosure process where a taxpayer prepares all tax returns to get in full compliance for prior filings and thus potentially avoid the criminal actions and penalties that the IRS has the ability to enforce. It’s important to note that if the IRS finds a non-compliant tax filer before a taxpayer applies voluntarily, then the case may not be accepted into the program. Also, in this ‘Special’ Voluntary disclosure process, an applicant’s tax returns may be scrutinized by Criminal Investigation Division Agents of the IRS before deciding on your case acceptance, criminal actions or a penalty waiver. When it comes to filing a voluntary disclosure of foreign assets, it’s vital to hire a Certified Public Accountant who is versed in international tax matters as well as a Tax Attorney.
As Wolters Kluwer states, “U.S. taxpayers holding foreign financial assets may be required to report certain information about those assets on Form 8938, Statement of Specified Foreign Financial Assets.”
As daunting as a small document can seem when it comes to filing tax forms, Form 8938 must be included as part of your annual tax return. Reporting for foreign taxes such as these applies for assets held in tax years beginning after March 18, 2010.
When the total value of specified foreign assets exceeds particular thresholds, Form 8938 becomes a requirement in your tax filing. An example of this, provided by Wolters Kluwers, is a married couple living in the United States and filing a joint tax return would not need to file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
But these thresholds are higher for taxpayers who reside outside of the United States. Another cited example is a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
If you are wondering who would need to file for this particular form, it can always be boiled down to U.S. citizens and tax residents and nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory. If you do not have an income tax return filing requirement, then of course you are not required to file with Form 8938. But bear in mind that a failure to report any foreign financial assets on this form could result in a penalty of $10,000. Further, failure to correctly report assets on this form could result in up to $50,000 in penalties for a continued failure to accurately report your assets even after IRS notifications have been made. And of course, underpayments of tax attributable to non-disclosed foreign financial assets are subject to an additional substantial understatement penalty of 40 percent. It’s penalties like these that make it so important to reach out to qualified professionals—professionals who know the ins-and-outs of tax rulebook, so to speak.
And since tax rules for foreign-sourced income and on foreign-based assets may be different from domestic tax treatment, there are many additional layers of complexity. If you have any additional questions regarding foreign assets, feel free to contact the offices of Rosillo and Associates, P.A. directly.
Rosillo & Associates, P.A. is located at 7950 NW 53 St. Suite 221, Doral, FL. For more information, please call (305) 477-5671
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