Offshore Disclosures USA
The U.S. is the only OECD country to tax its citizens, including an estimated 7 million expatriates, wherever they reside. For U.S. citizens or resident aliens the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether they are in the United States or abroad. Their worldwide income is subject to U.S. income tax, regardless of where they reside. For U.S. citizens and resident aliens abroad the 2010 Foreign Account Tax Compliance Act (FATCA), designed to curb tax evasion by U.S. taxpayers with offshore assets, has made tax matters very complex, requiring tax expertise typically not available abroad. Our experience has shown that U.S. citizens or residents living outside the US are not always aware of the additional reporting requirements.
Penalty regimes associated with these reporting requirements are severe. Nondisclosure can result in serious consequences. Taxpayers who previously failed to comply with US tax laws may have several options available to get on par with reporting requirements at a lower penalty rate provided they meet certain conditions.
Reporting Obligations for Foreign Assets and Investments
Foreign Financial Account Reporting (FBAR)
While reporting obligations have been on the books since the 1970s, reporting requirements and penalties under this regime increased in recent years. Today, U.S. taxpayers are required to disclose their financial interest in or signature or other authority over any foreign financial accounts if the combined value of their account(s) exceeds $10,000 at any time during a given calendar year.
The report can only be filed electronically. The prescribed exchange rate for 2015 is 0.9490 EUR / 1 USD (list of all exchange rates for 2008 - 2015, for 2016). FINCEN (Financial Crimes Enforcement Network) has issued detailed FBAR - Electronic Filing Instructions. Please contact us for assistance.
For more information about the FBAR, please click on the following link or contact us:
- Report of Foreign Bank and Financial Accounts (FBAR)
- Anwendung der Abkommen über Informationsaustausch (Tax Information Exchange Agreement - TIEA) – BMF – 10-Nov-15
- FATCA Anwendungschreiben – BMF – 3-Nov-15
- Automatischer Informationsaustausch mit den Vereinigten Staaten von Amerika, Abmachung 30-Nov-15
- Standard für den automatischen Austausch von Finanzinformationen in Steuersachen – BMF – 1-Feb-17
Additional Reporting Requirements by U.S. Taxpayers Holding Foreign Financial Assets (Form 8938)
Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer's requirement to file FBAR. A chart providing a comparison of Form 8938 and FBAR requirements, and other information to help taxpayers determine if they are required to file Form 8938, may be accessed from the IRS Foreign Account Tax Compliance Act Web page.
For more information about Form 8938, please click on the following link or contact us:
Passive Foreign Investment Companies (PFICs)
Among the most complex of IRS requirements affecting individual taxpayers are the rules for passive foreign investment companies (PFICs). Taxpayers owning interests in PFICs have a significantly higher reporting burden than U.S. taxpayers owning interests in U.S.-based mutual funds. Further complicating matters is that, unlike U.S.-based funds, foreign investments have no obligation to furnish U.S.-based investors with any tax reporting information, so the responsibility falls entirely on the shareholder to determine ownership share and tax obligations arising from that share.
U.S. taxpayers who hold certain types of investment in certain foreign entities generating mostly passive income are required to disclose them. U.S. taxpayers investing in these funds e.g. in foreign funds or ETFs are taxed even on the undistributed income the foreign investment generates. U.S. taxpayers holding this kind of investment cannot benefit from the potential tax deferral created by a systematic non-distribution of the foreign entity's income. The PFIC legislation provides options to taxpayers wanting to decrease the burden of this taxing regime.
For more information about PFICs, please click on the following links or contact us:
Foreign Pensions and Retirement Accounts
U.S. citizens who live and/or work for significant periods of time in foreign countries, as well as non-citizens who relocate to the U.S., often own some type of foreign pension or retirement account. These assets create unforeseen tax and reporting obligations.
The major concern in evaluating the taxability of ownership of foreign retirement accounts is that most overseas plans will not be considered “qualified plans” under IRC 401, which means the accounts generally do not qualify for tax-deferral treatment. In some instances, however, the Double Taxation Treaty and the Totalization Agreement may provide a reprieve, see also www.ssa.gov/international.
Taxpayers required to file a U.S. tax return may have to treat employer contributions to the foreign retirement accounts as taxable compensation, and any increase in the account’s value will be considered as taxable in the year the growth occurs.
Another major concern is the reporting obligation that ownership of foreign retirement account assets creates. Taxpayers with foreign retirement account interests often must file informational reports, such as FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR), FATCA reporting, and IRS Form 3520.
For more information about Foreign Pensions and Retirement Accounts, please contact us.
Controlled Foreign Corporations (CFCs)
If a foreign corporation qualifies as a "Controlled Foreign Corporation", its U.S. shareholders owning 10% or more of the total combined voting power of all classes of stock entitled to vote in this corporation must include certain types of the CFC's income in their U.S. gross income.
When a U.S. shareholder holds more than 50 percent of the vote or value of a foreign corporation, the company is a controlled foreign corporation or CFC. A U.S. shareholder is a U.S. person who owns 10 percent or more of the foreign corporation's total voting power. That triggers reporting, including filing an annual IRS Form 5471. It is an understatement to say this is an important form. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, and to each Form 5471 that is incomplete or inaccurate.
The penalty can apply even if no tax is due on the return. That seems harsh, but the next rule-about the statute of limitations-is even more surprising. If you have a CFC but fail to file a required Form 5471, your tax return remains open for audit indefinitely. Normally, the statute expires after three or six years, depending on the issue and its magnitude. This statutory override of the normal statute of limitations is sweeping. The IRS not only has an indefinite period to examine and assess taxes on items relating to the missing Form 5471. In fact, the IRS can make any adjustments to the entire tax return with no expiration until the required Form 5471 is filed. You might think of a Form 5471 like the signature on your return. Without it, it really isn't a return.
And don't assume that you have no issue if there is no CFC because U.S. shareholders don't own over 50%. In fact, Forms 5471 are not only required of U.S. shareholders in CFCs. They are also required when a U.S. shareholder acquires stock that results in 10 percent ownership in any foreign company.
For more information about CFCs, please click on the following link or contact us:
Form 926 - Return by a U.S. Transferor of Property to a Foreign Corporation
Instructions for Form 926
Form 1042S - Foreign Person's US Source Income Subject to Withholding
Form 1116 - Foreign Tax Credit
Instructions for Form 1116
Form 3520 - Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
Instructions for Form 3520
Form 3520-A - Annual Information Return of Foreign Trust With a U.S. Owner
Instructions for Form 3520-A
Form 5471 - Information Return of U.S. Persons With Respect To Certain Foreign Corporations
Instructions for Form 5471
Form 8621 - Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
Instructions for Form 8621
Form 8621-A - Return by a Shareholder Making Certain Late Elections To End Treatment as a Passive Foreign Investment Company
Instructions for Form 8621-A
Form 8832 - Entity Classification Election
Form 8854 - Initial and Annual Expatriation Statement
Instructions for Form 8854
Form 8858 - Information Return of U.S. Persons With Respect To Foreign Disregarded Entities
Instructions for Form 8858
Form 8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships
Instructions for Form 8865
Form 8938 - Statement of Specified Foreign Financial Assets
Instructions for Form 8938
Report of Foreign Bank and Financial Accounts
Available Voluntary Disclosure Options – The 2014 Offshore Voluntary Disclosure Program (2014 OVDP)
Taxpayers who did not fully comply with U.S. tax laws always had the opportunity to disclose and solve tax issues through voluntary disclosures. At this time, the general Voluntary Disclosure Agreements are designed and used only for taxpayers not having any foreign income or any reporting requirements concerning their foreign assets. Therefore, in addition to the traditional voluntary disclosure option, the IRS instituted standardized Voluntary Disclosure Programs for tax compliance purposes (the 2009 and 2011 Offshore Voluntary Disclosure Initiatives and the 2012 Offshore Voluntary Disclosure Program, modified on June 18, 2014 - 2012 OVDP and 2014 OVDP). Since they are standardized programs, these initiatives give taxpayers who disclose under them a more precise understanding of what to expect.
The 2014 Offshore Voluntary Disclosure Program (2014 OVDP), effective for submissions made on or after July 1, 2014, comes with detailed Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers as well as Transition Rules: Frequently Asked Questions (FAQs). Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS offers the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those investments:
- Offshore Voluntary Disclosure Program;
- Streamlined Filing Compliance Procedures;
- U.S. Taxpayers Residing Outside the United States
- Required: Certification by U.S. Person Residing Outside of the U.S. - see note below
- U.S. Taxpayers Residing in the United States
- Required: Certification by U.S. Person Residing in the U.S. - see note below
- Delinquent FBAR submission procedures; and
- Delinquent international information return submission procedures.
The IRS has simplified the process of entering the OVDP Program by issuing the following forms:
- Form 14452 - Foreign Account or Asset Statement
- Form 14453 - Penalty Computation Worksheet
- Form 14454 - Attachment to Offshore Voluntary Disclosure Letter
- Form 14457 - Offshore Voluntary Disclosure Letter
- Form 14653 - Foreign Streamlined Certification - see note below
- Form 14654 - Domestic Streamlined Certification - see note below
Note: You must provide specific facts on this form or on a signed attachment explaining your failure to report all income, pay all tax, and submit all required information returns, including FBARs. Any submission that does not contain a narrative statement of facts will be considered incomplete and will not qualify for the streamlined penalty relief. In January and February 2016 the IRS revised the Foreign and Domestic certification forms for the Streamlined Procedures ( Form 14653 and Form 14654) . Among other changes there is now a "Paid Preparer Section" for the preparer of the Certification as well as a tick box to indicate whether or not the filer permits the IRS to speak with that individual. A detailed description of the facts that the IRS deems important to include in the Streamlined statement is provided and clearly emphasizes that the taxpayer provide specific reasons for his tax noncompliance and that he tell the complete story. All this tells that the IRS is looking more deeply at Streamlined filers. The longer the time drags on before compliance is achieved, the more the IRS will be questioning if the taxpayer really was "non-willful".
The Streamlined Filing Procedure – How it works
While returns submitted under the Streamlined Filing Compliance Procedures would not be subject to IRS audit automatically, the IRS points out that they may be selected for audit under existing audit selection processes applicable to any U.S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources. Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct and who therefore seek assurances that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating in the Offshore Voluntary Disclosure Program and should consult with their tax professional or legal advisers. After a taxpayer has completed the streamlined filing compliance procedures, he or she will be expected to comply with U.S. law for all future years and file returns according to regular filing procedures.
The Streamlined Filing Procedure will be discontinued at some point
IRS officials, including Commissioner John Koskinen, have stated that the streamlined filing program for the disclosure of previously unreported foreign financial accounts would not last forever and would end at some point. The streamlined filing program was introduced in June of 2014 and is designed to bring U.S. taxpayers with offshore holdings (e.g., foreign bank accounts and other income-producing assets) into compliance with the U.S. tax and reporting regime with a little less paperwork. Since its inception, according to the IRS, more than 20,000 taxpayers have come forward to voluntarily disclose their offshore financial accounts through the program. Although the IRS has not yet designated an exact date when this program will end, IRS officials have repeatedly made clear that at some point, the program would end, because the IRS assumes that eventually taxpayers with offshore holdings will have received enough notice to voluntarily come forward for compliance.
"Quiet Disclosure" – A Ticking Time Bomb: Time to Join the OVD Program?
The IRS warns against so-called "Quiet Disclosures" (amending returns without disclosing) which some taxpayers have chosen to do in the past, (see FAQ 15, Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers). The IRS is aware that some taxpayers have made "quiet disclosures" by filing amended returns, by filing delinquent FBARs, and paying any related tax and interest for previously unreported income from OVDP assets (see FAQ 35) without otherwise notifying the IRS. Taxpayers who have already made "quiet disclosures" are encouraged to participate in the OVDP by submitting an application, along with copies of their previously filed returns (original and amended), and all other required documents and information (see FAQ 25) to the IRS's Voluntary Disclosure Coordinator (see FAQ 24). Taxpayers are encouraged to avail themselves of the protection from criminal prosecution and the favorable penalty structure offered under the OVDP. Unlike a voluntary disclosure through the OVDP, quiet disclosures provide no protection from criminal prosecution and may lead to civil examination and the imposition of all applicable penalties.
"Those who still think they can hide their assets offshore need to rethink their strategy." Please call us for a confidential consultation.
Opting Out of the Offshore Voluntary Disclosure Program
If the penalty imposed upon the taxpayer under the 2012 or 2014 OVDP is considered too high, the taxpayer has the option to withdraw or to opt out of this OVDP ("OVDP Opt-Out", FAQ 51 and Opt Out and Removal Guide) at any time throughout the program and utilize the standard procedure. The OVDP Opt-Out, sometimes also called "Qualified Quiet Disclosure", is an option that offers taxpayers a way to become compliant. With this option, taxpayers can file past tax returns on their foreign accounts and pay their penalties, and still avoid the highly rigid, punitive and expensive penalties associated with the OVDP. In essence, a participant signs up for the OVDP, reports all offshore accounts, files past tax returns on those accounts, and clears themselves of suspicion. Once all the information has been disclosed to the IRS and the process is in its last stage, the participant opts out of the OVDP program. The OVDP Opt-Out offers the taxpayer constitutional protections that were removed when a taxpayer signed up for the OVDP. In addition, taxpayers can avoid the stringent and hefty penalty structure of the OVDP. With the OVDP Opt-Out, a taxpayer still has the right to protect his interests and contest penalties by the IRS.
We have guided and accompanied our clients through this process, sometimes as a first step to relinquishing the U.S. citizenship ("expatriation"). For a "Green Card" holder ("Resident Alien") choosing the OVDP Opt-Out procedures may be particularly important in view of the Kawashima case ("Supreme Court Finds Tax Crimes are Grounds for Deportation").
For more information about the OVDP Opt-Out, contact us.
Consequences of the FATCA Regime on U.S. taxpayers not in compliance with their U.S. tax requirements
As stated previously, FATCA requires taxpayers who own specified foreign assets to disclose them when they exceed certain thresholds. However, more than requiring such disclosure from the asset holders, the FATCA regime requires certain foreign institutions to disclose their US account holders (but not only). Failure to do so results in the withholding of a 30% tax on certain payments made from the U.S. to these specific foreign institutions. Since this withholding constitutes a real threat, foreign institutions are likely to try to comply with the FATCA disclosure requirements.
Most importantly, the U.S. has entered into bilateral intergovernmental agreements ("IGA") to implement the information reporting and withholding tax provisions of the FATCA regime. Through these agreements, the U.S. authorities will have access to the information of accounts held abroad by U.S. persons. That, in turn, will make it easy for the U.S. authorities to find out about any undisclosed foreign asset a U.S. person may hold.
U.S. taxpayers not in compliance with their U.S. tax requirements may want to think very seriously about coming forth under the OVDP, instead of waiting for the IRS to discover their foreign assets, and facing criminal prosecution.
Expatriation Tax – Wegzugsbesteuerung USA
We guided and piloted many of our clients through the maze of the expatriation and the expatriation tax (amerikanische Wegzugsbesteuerung).
For more information about Expatriation - Wegzugsbesteuerung USA, please contact us. We will walk with you and explain, step by step, the expatriation rules, using the references below.
IRS on Expatriation Tax
Form 8854 - Initial and Annual Expatriation Statement
Instructions for Form 8854
IRS Publication 519 - residence rules, dual status tax return
Notice 2009-85 - the only thing the IRS has published on expatriation so far
Notice 97-19 - from the old expatriation rules
Internal Revenue Code Sections 877, 877A - the old and current exit tax rules, respectively
Internal Revenue Manual Section 18.104.22.168.5 - how the IRS will process your return
Proposed Regulations Under Section 2801 – Gifts and Bequests from Covered Expatriates