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Common FBAR Errors for US Expats AND the Complications of a Foreign Trust
By Janathan L. Allen, Tax Attorney/Partner – Allen Barron, Inc, & Janathan L. Allen, APC
US expatriates continue to retain the responsibility to disclose information about assets and accounts to the IRS though the Report of Foreign Bank and Financial Accounts or FBAR (Form 114). Typically, FBAR is due with your returns on April 15th. However, the IRS provides an automatic extension both to file taxes and FBARS to June 15 those who live outside of the United States. An additional extension to October 15th may be obtained with a written request to the IRS which will automatically extend the FBAR as well.
All US expatriates who have a financial interest in or signature authority over foreign financial account(s) that in aggregate exceed $10,000 at any time during the year must report all of those foreign financial accounts on the FBAR. The FBAR is not part of the tax return, but is filed separately with FinCEN, the Financial Crimes Enforcement Network, part of the U.S. Department of the Treasury.
FBAR filing requirements include, but are not limited to:
★ Foreign bank accounts anywhere in the world;
★ Financial account(s) held at a foreign branch of a US bank;
★ Securities accounts;
★ Foreign stock or securities held in a financial account at a foreign financial institution (you must report the account itself should not be required to disclose the contents of the account);
★ Specific foreign retirement arrangements;
★ Foreign mutual funds;
★ Foreign-issued life insurance or annuity contract with a cash surrender value.
What are some of the common FBAR errors and omissions for US expats?
One of the most common omissions relates to life insurance policies or annuity contracts with a cash surrender value and foreign retirement accounts. If your insurance policy or annuity has a cash surrender value it must be reported on your FBAR as well as your foreign retirement accounts.
Personal loans are another common area of omission as a loan itself must be disclosed on your FBAR. Many fail to report personal loans assuming they are inconsequential.
Real estate in and of itself isn’t automatically reportable. However, if it is a source of rental income it must be disclosed.
What should you do if you have failed to file or have errors or omissions on your current or previous FBAR(s)? Don’t worry. According to the IRS millions of your fellow US persons are in the same position and the IRS Streamlined Foreign Offshore Filing Procedures is an amnesty program for US expats. Previous restrictions on the Streamlined Filing Procedures prevented many US expatriates from considering this option. The good news is the IRS recently lifted those restrictions to make it easier to come into FBAR compliance.
Best of all, there are no late filing or FBAR penalties for US expatriates, so you can ease your conscience and file previous FBARs without the previous harsh penalties.
If you are anticipating the creation of a foreign trust my advice is simple: don’t. A foreign trust is often a poor strategy for a US expat based upon US taxation issues alone. Foreign trusts are onerous for a US person or expat – not just in terms of reporting and compliance but the 55% tax rate as well.
That said, you may already have a foreign trust or personal situation may have dictated financial choices in the past. If you do have control of or signatory power over a foreign trust of any value you are required to report your holdings and interests (IRS Forms 3520 and 3520-A). You must also report any income or appreciation of any of the assets of the trusts. Income and appreciation of foreign assets has profound US tax implications for American expatriates.
The US wants to discourage the foreign trust as an instrument for holding interests and assets and therefore the resulting increased focus on tax for this source of income. If you presently have a foreign trust my best advice is to consider holding the assets directly.
The reality in many cases is these assets are actually held by parents or other family members and the foreign trust is part of a generational wealth transition strategy. In that case, talk to an experienced international tax professional.
Allen Barron, Inc. & Janathan L. Allen, APC specialize in complex international tax issues. Go to www.allenbarron.com for more information.
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