Tax Tips For U.S. Expat Taxpayers

If you have fallen behind on your U.S. expat taxes and the IRS has contacted you about delinquent tax returns, what should you do? Here are a few tips on what to do next.

Tip #1 – Do Not Ignore The Notice.

The worst thing you can do is ignore the notice. If you don’t think that you will be able to gather the proper documentation and file the return(s) by the deadline they provide, call them right away. Explain that you are aware of the delinquency and you are doing your best to resolve it. Often they will give you a few extra weeks if you are honestly trying to resolve the situation. If you do nothing at all, the IRS can file a return on your behalf and assess a liability of what they think you owe. Expats in particular want to avoid this, as the IRS won’t include any deductions or credits you may be eligible for—this could be very costly! Hiring a tax attorney would be most helpful to you to secure the additional time and get the information you need.

Tip #2 – Form A Plan.

The IRS may have only requested a particular year or two, but it’s important to determine exactly how many years you are behind and get caught up on all delinquent returns (up to six years is recommended). Most expats who are behind on their returns were unaware of their need to file and will be delinquent for more than one year. While they may only currently be aware of a certain year you failed to file, it is very likely they will eventually uncover the others and then you’ll need to do the entire process all over again. Hiring a tax attorney would be most helpful if you aren’t sure how many years you are behind. A tax attorney can also qualify you for amnesty in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI).

Tip #3 – Gather Your Documents.

The first step, and arguably the most time-consuming, is digging up the documents necessary to file back taxes. Most importantly, you will need to gather any 1099s, W2s or other US income reporting statements. Hiring a tax attorney would be most helpful if you have misplaced these documents, as copies can be requested from the IRS. A tax attorney can also help you identify exactly what you need to collect.

Tip #4 – Prepare And File.

With the complexity surrounding tax reporting by expats, a tax attorney would be most helpful in making sure that all reporting obligations are satisfied and that you are utilizing all tax breaks including carryovers from the Foreign Tax Credit or any capital losses.

Tip #5 – Evaluate Your Options.

Sometimes there are taxes owed on back tax returns and if you can’t pay everything you owe, there are options to avoid collection action by the IRS. Most taxpayers will apply for an Installment Agreement but keep in mind that with this option, interest and penalties continue to accrue so long as you have a balance, so paying as much as possible will help reduce the total debt over time. A tax attorney would be most helpful in determining your options and whether penalties can be abated.

The process of becoming compliant with your U.S. expat taxes can be stressful, but hiring a tax attorney with experience in this area and getting caught up as soon as possible is clearly your best option. The longer you wait, the more expensive it can be. This is particularly important if you need to file past FBARs, as the IRS is cracking down on tax evaders and stiff penalties can be assessed for every year you are delinquent.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and elsewhere in California qualify you for OVDI.

IRS Says “Foreign” Online Gambling Accounts Must Be Reported On An FBAR

Given all the press surrounding the “Report of Foreign Bank and Financial Accounts” or so-called FBARs, by now we all know about what should be reported on an FBAR, right? Well, given the Internal Revenue Service’s latest assertion in United States v. John C. Hom (Case No. C 13-03721 in the U.S. District Court for the Northern District of California), maybe we had better start studying once again.

Online Gambling Accounts

Mr. Hom was an avid and professional internet gambler with online gambling accounts maintained with various popular overseas entities such as FirePay.com (based in London), PokerStars.com (based in Isle of Man), and Partypoker.com (based in Gibraltar). The overseas gambling accounts circumvent U.S. laws that prohibit the interstate operation of betting businesses in the United States thus making online gambling technically illegal.

Mr. Hom was randomly selected for an audit when during the course of the audit the IRS agent discovered the online gambling accounts. The IRS then assessed the FBAR negligence $10,000 penalty for each unreported online gambling account for each year at issue. While

While these online accounts may not be a traditional type of financial accounts (such as a bank account), the IRS contends that they functioned in the same way as such traditional accounts. For example, taxpayer opened the accounts in his own name, he had a user name and password, funds were transferred or disbursed from the accounts at taxpayer’s discretion, taxpayer could transfer funds from one account to another, deposit and withdraw funds at will and could carry a balance in the accounts. For these reasons, the IRS maintains that the accounts at FirePay.com, PokerStars.com, and Partypoker.com are “bank, securities, or other financial account[s]” for purposes of FBAR reporting under the Bank Secrecy Act provisions.

This issue is currently being considered by the judge. We will keep you updated on what happens.

Who Must File FBAR?

The Bank Secrecy Act requires that a Report of Foreign Bank and Financial Accounts (FBAR), be filed if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year. This form is used as part of the IRS’s enforcement initiative against abusive offshore transactions and attempts by U.S. persons to avoid taxes by hiding money offshore.

The FBAR covers a calendar year and must be filed no later than June 30th of the following year (regardless of whether you file an extension for you Form 1040) and includes any interest a U.S. person has in:

Offshore bank accounts
Offshore mutual funds
Offshore hedge funds
Offshore variable universal life insurance policies
Offshore variable annuities a/k/a Swiss Annuities
Debit card and prepaid credit card offshore accounts
Effective September 30, 2013, Form TD F 90-22.1 (the old FBAR form used in previous years) has been replace by FinCEN Form 114. Also, unlike the old FBAR form which was filed in paper format only, FinCEN From 114 can only be filed electronically. The deadline to file remains June 30th following the reporting calendar year (i.e., the 2013 FBAR is due June 30, 2014). No extensions are available.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

The Solution For Past Noncompliance

The IRS is giving taxpayers one last chance to come forward and voluntarily disclose foreign accounts and unreported foreign income before the IRS starts investigating non-compliant taxpayers.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and elsewhere in California qualify you for OVDI.

Reminder For Taxpayers with Foreign Assets of 2014 U.S. Tax Filing Obligations

U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2013 who will have a U.S. tax liability need to be mindful of their filing requirements in 2014.

The filing deadline is Monday, June 16, 2014, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies.

Nonresident aliens who received income from U.S. sources in 2013 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 16 depending on sources of income.

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.
Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds.

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online through the BSA E-Filing System website.

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

The IRS is giving taxpayers one last chance to come forward and voluntarily disclose foreign accounts and unreported foreign income before the IRS starts investigating non-compliant taxpayers.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s 2012 Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco and elsewhere in California qualify you for OVDI.

IRS Guidance Issued On Bitcoin Tax Reporting Requirements

Bitcoin has been in the news frequently lately, particularly since the collapse of the Japanese-based Bitcoin exchange, Mt. Gox.  Bitcoin is a digital currency and peer-to-peer payment system created in 2009. Since 2009, the use of bitcoins has expanded significantly.  Bitcoins can be bought and sold for various currencies, generally through a series of online exchanges where participants can bid on bitcoins from individuals or buy them at market price from companies.

The unique characteristics of Bitcoin as a digital currency left many questions about tax reporting requirements, such as whether users of Bitcoin must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).  U.S. taxpayers who have an interest in, or signatory or other authority over a foreign financial account, such as a bank account, securities or other similar foreign accounts must file an FBAR if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported. For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

Prior to the Internal Revenue Service’s release of Notice 2014-21 on March 25, 2014, we did not know whether the IRS would treat a virtual currency as currency or property. The IRS has now said – treat it as property. [IRS Information Release IR-2014-36 and Notice 2014-21].  I think that is a good answer. After all, Bitcoin is not used as the currency of any government and generally, are convertible to a currency of a government. For example, you can buy Bitcoin with U.S. dollars and convert it back to U.S. dollars.

So, what does it mean that Bitcoin is property? Here are a few tax examples.

• If you mine Bitcoin, you generate income equal to the value of the Bitcoin when mined. And if you are doing this as a business, you’ll also owe self-employment tax. [See Q&A 8 and 9 of Notice 2014-21].

• If you buy Bitcoin so you can use it instead of dollars, you’ll have some extra recordkeeping to handle. For example, you bought 1 Bitcoin (BTC) when it was worth $700. You later use half of that BTC to buy goods and at that time, 1 BTC is worth $800. You have a $50 gain. A few months later, you use the remaining .5 BTC to buy goods and at the time, 1 BTC is worth $1,000, you will report a gain of $150. The tax principle here is that if your wealth has increased and you cash out that wealth (realize it), you have income. When you can use something you paid $700 for to buy $900 of goods, you have income of $200. This is the same result you’d have if you had converted the Bitcoin back to dollars right before making the purchase of the goods in dollars. [See Q&A 6 and 7 of Notice 2014-21]

• Your employer pays you in Bitcoin. You’ll have income equal to the value of the Bitcoin on the day you receive it. And, yes, the employer will include this income in your W-2. Same answer if you are instead a contractor; it will be included in the Form 1099 your employer gives you. [See Q&A 10-14 of Notice 2014-21]

Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide.  The knowing omission of such income can result in a minimum fine of $10,000 and/or potential incarceration of at least 1 year besides the standard civil penalties associated with the increase in tax and interest thereon.  U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year.  Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.

U.S. taxpayers who have bitcoins would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing bitcoins.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

FBAR: Goodbye Form TDF 90.22-1 and Hello FinCEN Form 114

The Financial Crimes Enforcement Network (FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes. On September 30, 2013, FinCEN posted on their internet site, a notice stating that the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (the current FBAR form) would replace Form TD F 90-22.1 (the old FBAR form used in previous years). If you have a financial interest in, or you are signatory authority over foreign account(s) that total more than $10,000 at any time during the calendar year, you are required to file Form 114 no later than June 30th for the following year. The 2013 Form 144 is due June 30, 2014.

Some of the new features of Form 114 include:

1) The requirement that From 114 must be filed electronically. The old FBAR allowed paper filing but that is no longer the case with Form 114. It must be filed electronically.

2) An option where you can “explain a late filing”. You can also indicate whether the filing is made in conjunction with an IRS compliance program.

The electronic filing system on the FinCEN website is called the BSA E-Filing System (BSA standing for the Bank Secrecy Act) and it allows you to save changes to your form, track progress of the processing of your form and receive electronic notices. Either you or your tax preparer can file this form. By having your foreign account information submitted electronically to the U.S. Treasury, the government will be able to more quickly and effectively match this information to foreign sourced income reported on your current and past Federal income tax returns. Discrepancies would be identified by the government’s computer and those taxpayers would be referred for examination or investigation by the IRS.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

With the option for taxpayers to include why this Form for any prior year is being filed late, taxpayers may be tempted to use this process in an attempt to come into compliance for failing to report foreign income on prior year’s income tax returns and/or failing to disclose foreign bank accounts. Beware that such disclosure does not protect you from the heavy fines and possible criminal charges. Instead, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Bitcoin Tax Reporting Requirements

Bitcoin has been in the news frequently lately, particularly since the collapse of the Japanese-based Bitcoin exchange, Mt. Gox. Bitcoin is a digital currency and peer-to-peer payment system created in 2009. Since 2009, the use of bitcoins has expanded significantly. Bitcoins can be bought and sold for various currencies, generally through a series of online exchanges where participants can bid on bitcoins from individuals or buy them at market price from companies.

The unique characteristics of Bitcoin as a digital currency leaves many questions about tax reporting requirements, such as whether users of Bitcoin must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).U.S. taxpayers who have an interest in, or signatory or other authority over a foreign financial account, such as a bank account, securities or other similar foreign accounts must file an FBAR if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30thof the year following the calendar year being reported. For example, toreport foreign accountsheld open in 2013, the taxpayer must file the FBAR by June 30, 2014.

The first major issue with whether a U.S. taxpayer must file an FBAR on a Bitcoin account is whetherthese accounts qualify as a “financial account” as defined on the FBAR form.  The FBAR instructions define a “financial account” to include “a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution).”

FinCEN could deem a Bitcoin account a financial account, particularly since FinCEN has required some exchanges to register as Money Service Businesses.  SeeFIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” March 18, 2013.  Furthermore, bitcoins can be spent like regular currency to purchase items or can be exchanged for various currencies that would be subject to the FBAR requirements if held in a financial account.

On the contrary, significant parallels can be drawn between bitcoins and a safety deposit box holding gold coins.  A user that owns bitcoins can essentially print out the bitcoins on paper and hold them physically, such as holding gold coins in a safety deposit box.  The IRS has stated that a U.S. taxpayer who owns gold coins in a safety deposit box has “direct ownership” of this asset, which means the taxpayer does not need to file an FBAR or a Form 8938, Statement of Specific Foreign Financial Assets (discussed below).  However, if the gold coins are held in an account at a foreign bank, the value of those gold coins, and possibly bitcoins, must be reported on the FBAR and Form 8938.

As discussed above, the U.S. taxpayer who owns bitcoinsmay also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return, if the Bitcoin accounts are financial accounts.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations.  These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations.  For failing to file a correct Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

U.S. taxpayers who have bitcoins would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing bitcoins.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Required Disclosures To The IRS Of Indian Accounts – NRE, NRO and PPF

The U.S. government requires U.S. tax persons to report their “worldwide income” from any source whether it is earned in the U.S. or abroad.  A U.S. tax person includes both U.S. citizens, green card holders and other persons satisfying the substantial presence in the U.S. standard.

Indian nationals residing in the U.S. who hold Indian accounts with an aggregate balance of over $10,000 (U.S.) are required to report those accounts on a Foreign Bank Account Report (“FBAR”).  In addition, any income earned on those accounts need to be included on any U.S. income tax returns.

There are different types of Indian accounts that an Indian national may hold.  A Non-resident Ordinary Account (“NRO”) is an account made for income earned in India.  Income earned on an NRO may be taxed by the Indian government.  There is a limit of $1 million (U.S.) net of taxes that can be repatriated from an NRO in any given year.

A Non-resident External Account (“NRE”) is an account which allows an Indian national to hold income earned outside of India and is not taxed by the Indian government.  There is no limit on the amount that can be repatriated.

Funds held in both NRO’s and NRE’s must be in Indian Rupees.

Taxes paid to the Indian tax authorities for interest income earned from an NRO may be claimed as foreign tax credit on the U.S. tax return to avoid “double taxation”.

Another type of account an Indian national may hold is a Public Provident Fund (“PPF”).  A PPF is savings vehicle that has restrictions on withdrawals and any earnings on a PPF are not taxed by the Indian government.  Only an Indian citizen residing in India may initially open a PPF but if he or she becomes a resident of another country while holding the PPF, he or she may be allowed to hold the PFF under certain circumstances.  While this type of account may be utilized as a retirement fund in India, it is not recognized by the U.S. as a tax-deferred retirement account.  Therefore, the U.S. requires that income on PPF’s be included on an Indian national’s U.S. income tax return.

Recently, the IRS has announced more aggressive efforts in cracking down on Indian account holders, particularly in Northern California.  If you have never reported income from your foreign accounts or foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (“OVDI”) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

U.S. Reporting Requirements for Certain Canadian Savings Plans

U.S. taxpayers who own a Canadian Registered Retirement Savings Plan (RRSP), Canadian Registered Retirement Income Fund (RRIF) or own or are the beneficiary of a Canadian Registered Education Savings Plan (RESP) may have special tax reporting requirements.

Reporting Requirements for all RRSPs, RRIFs, and RESPs

Some IRS reporting requirements are the same for RRSPs, RRIFs, and RESPs. For all three types of accounts, U.S. taxpayers who have an interest in, or signatory or other authority over these foreign accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of the foreign trust accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported. For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

In addition to filing an FBAR form, the U.S. taxpayer with an interest in these Canadian accountsmust follow certain reporting requirements on his or her annual tax return. First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return. On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts. Questions 7a asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account. Question 7b also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located. Finally, Question 8 asks whether the U.S. taxpayer received a distribution from, or was the grantor of, or transferor to, a foreign trust, which includes RESPs.

The U.S. taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return. Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts. For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your interest in the foreign accountsis more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

RRSPs and RRIFs Unique Reporting Requirement

RRSPs and RRIFs have one unique filing requirements. These two accounts are two types of Canadian retirement account for holding assets, similar to a U.S. IRA or 401(k) retirement plan. Also similar to U.S. IRA and 401(k) plans, RRSPs and RRIFs enjoy tax-deferral benefits in Canada. By default, U.S. taxpayers who have an interest in an RRSP or RRIF do not have tax-deferral benefits on their U.S. income tax returns. However, a U.S. taxpayer may elect to receive similar tax-deferral status of their RRSP or RRIF by filing a Form 8891.

Even if a U.S. taxpayer does not elect tax-deferral status of their RRSP or RRIF, he or she must still file a Form 8891 a) to report contributions to RRSPs and RRIFs; b) to report undistributed earnings in RRSPs and RRIFs; and c) to report distributions received from RRSPs and RRIFs.

RESPs Unique Reporting Requirements

By contrast, a Canadian RESP is generally treated as a foreign trust and must follow similar reporting requirements to a foreign trust.

When the RESPexperiences a “reportable event,” the U.S. taxpayer must file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Reportable events generally occur when the taxpayer makes a contribution to or receives distributions from an RESP.

The U.S. taxpayer must also file a Form 3520-A, Annual Information Return of Foreign Trust
With a U.S. Owner. This form is an annual information return that provides information about the RESP, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the RESP.

A U.S. taxpayer who transfers money or property to a foreign trust may also be required to file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Generally, a U.S. taxpayer who transfers money or property totaling more than $14,000 for the year must file a Form 709. Form 709 is a separate tax return, which is not submitted with the taxpayer’s annual tax return.

Finally, RESPs do not enjoy the tax-deferral benefits afforded to RRSPs and RRIFs by making the Form 8891 election. Accordingly, the owner of an RESP must include any earnings in the RESP on his or her annual U.S. income tax return.

Penalties

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer. Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations. These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations. For failing to file a correct Schedule B or Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

Failure to file a correct and complete Form 3520results in an initial penalty of the greater of $10,000, 35% of the gross value of any property transferred to or distribution from a foreign trust, or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. taxpayer. An additional 5% penalty of any unreported foreign gifts may also apply for each month for which the failure to report continues.

Finally, failure to file a Form 709 may come with penalties for willful failure to file a return on time, willful attempt to evade or defeat payment of tax, and valuation understatements that cause an underpayment of the tax. A 20% penalty of the tax underpayment may be imposed on both a substantial valuation understatement (the reported value of property listed on Form 709 is 65% or less of the actual value of the property) and a gross valuation understatement (the reported value listed on the Form 709 is 40% or less of the actual value of the property).

U.S. taxpayers who have an interest in a Canadian RRSP, RRIF, or an RESP would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with having an interest in a foreign trust.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Foreign Trusts – Filing Requirements

All U.S. taxpayers who have an interest in, or signatory or other authority over foreign trust accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of the foreign trust accounts exceeds $10,000 at any time during the calendar year.  As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported.  For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

A U.S. taxpayer is deemed to have a foreign interest in a foreign trust account in two situations.  First, the owner of record or holder of legal title is a trust of which the U.S. taxpayer is the trust grantor and has an ownership interest in the trust for U.S. federal tax purposes.  Second, the owner of record or holder of legal title is a trust in which the U.S. taxpayer has a greater than 50 percent present beneficiary interest in the trust’s assetsor in the trust’s current income for the calendar year.  The U.S. person who is a trust beneficiary may be exempted from filing an FBAR, however, if the trust, trustee, or agent of the trust is a U.S. person and files an FBAR disclosing the trust’s foreign financial accounts.  A U.S. person who is only a reminder beneficiary or is the beneficiary of a discretionary trust is not required to file an FBAR for the trust as these interests are not “present” beneficiary interests.

In addition to filing an FBAR form, the U.S. taxpayer with an interest in a foreign trust account must follow certain reporting requirements on his or her annual tax return.  First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return.  On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts.  Questions 7a asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account.  Question 7b also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located.  Finally, Question 8 asks whether the U.S. taxpayerreceived a distribution from, or was the grantor of, or transferor to, a foreign trust.

If the U.S. taxpayer answered yes to Question 8 on Schedule B, he or she may be required to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.  Form 3520 applies to several types of U.S. taxpayers, including those who received a distribution from a foreign trust and those who created or transferred money or property to a foreign trust.

The U.S. taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return.  Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts.  For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your interest in the foreign trust is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. The value of the interest in the foreign trust equals the value of all cash or other property distributed during the tax year to you as beneficiary plus a value indicated on the valuation tables under section 7520.

A U.S. taxpayer who transfers money or property to a foreign trust may also be required to file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.  Generally, a U.S. taxpayer who transfers money or property totaling more than $14,000 for the year must file a Form 709.  Form 709 is a separate tax return, which is not submitted with the taxpayer’s annual tax return.

Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer.  Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations.  These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations.  For failing to file a correct Schedule B or Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.

Failure to file a correct and complete Form 3520results in an initial penalty of the greater of $10,000, 35% of the gross value of any property transferred to or distribution from a foreign trust, or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. taxpayer.  An additional 5% penalty of any unreported foreign gifts may also apply for each month for which the failure to report continues.

Finally, failure to file a Form 709 may come with penalties for willful failure to file a return on time, willful attempt to evade or defeat payment of tax, and valuation understatements that cause an underpayment of the tax.  A 20% penalty of the tax underpayment may be imposed on both a substantial valuation understatement (the reported value of property listed on Form 709 is 65% or less of the actual value of the property) and a gross valuation understatement (the reported value listed on the Form 709 is 40% or less of the actual value of the property).

U.S. taxpayers who have an interest in a foreign trust would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with having an interest in a foreign trust.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Report of Foreign Bank and Financial Accounts (FBAR) Filing Limits

In addition to annual income tax forms, certain taxpayers are required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”; previously called Form TD F 90-22.1).  All U.S. taxpayers who have an interest in, or signatory or other authority over a bank, securities or other similar foreign accounts must file an FBAR, if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.  The $10,000 threshold value applies whether the taxpayer holds the financial accounts separately or jointly with another person or persons.

As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported.  For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.

U.S. taxpayers who have foreign financial accounts would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing foreign financial accounts.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.