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To say that international US taxation and foreign bank account reporting is loaded with traps is an understatement. These traps can overwhelm individuals, and even their own tax professionals. We have clients who already went through a voluntary disclosure program to clear up their mistakes prior to hiring us, yet they find their representation did not completely clear up their mistakes. They may realize that their voluntary disclosure was incomplete - maybe a foreign reporting form was left off, or something wasn't included on an FBAR.
Just because a mistake was made does not mean you need to go through an arduous Offshore Disclosure program. It does mean you need to take steps to correct past errors and avoid future errors.
When we speak with someone the first time, we like to go over what was filed and review what foreign assets and bank accounts they have. We want to see if anything is missing and find the most effective way for dealing with the errors. We want to be in compliance, and we also want to avoid as many penalties as we can.
This is not a complete list, but here are the most common foreign assets and earnings that individuals and tax professional routinely miss, or fail to properly report:
Missing Form 8938: Even if you have filed an FBAR correctly, you may still need to file an IRS Form 8938 Statement of Specified Foreign Financial Assets. The Form 8938 and FBAR are somewhat similar, but do have different requirements. Failing to file a Form 8938 can result in a penalty of $10,000 per occurrence, and failure to file or improper filing keeps your entire tax return open for audit indefinitely (the typical is three or six years). Also, your non-term foreign life insurance policy is likely to be treated as an investment and earnings may be taxable.
Foreign life insurance: It will often need to be included on an FBAR and also on Form 8938. There is also one more form it should be included on -- the foreign excise tax Form 720 that is due quarterly.
Foreign Mutual funds: These may be required to be filed on an FBAR and Form 8938 but again, there is one more form -- Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company ("PFIC"). Penalties for non-filing are $10,000 per occurrence.
Foreign Pensions/Retirements: You may have both a Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A Annual Information Return of Foreign Trust With a U.S. Owner. Your reporting requirements depend on if a treaty exists. If a treaty does exist, you need to know what the treaty, protocols, and savings clause state.
Foreign Inheritance: The good news is if you inherit large sums from overseas, you will not have a tax liability. The bad news is the IRS still wants to know everything about it. You must file Form 3520 or be subject to a penalty that is a percentage of the inheritance.
At Parent & Parent LLP our attorneys, CPAs, and tax specialists can not only clean up any past non-compliance that may be causing you to lose sleep, but our in-house tax preparation team can keep you in good standing year-after-year. Call us at 888-727-8796, email us at firstname.lastname@example.org, or contact us here to set up a free, confidential consultation.
We also invite you to review success stories and case studies of clients of ours.
Immigrants, Visa holders, Green Card, naturalize citizens coming into the US with assets and income overseas: Watch this video: