The U.S. reporting requirements for individuals with foreign assets are complex. This post will focus on the reporting requirements for a citizen and resident of the U.S. with a foreign financial account. The starting point for these requirements will be Schedule B, Interest and Dividends, for Form 1040, U.S. Individual Income Tax Return.
Part III of Schedule B, Question 7, asks whether the taxpayer had, in the past year, "a financial interest in or signature authority over a financial account... located in a foreign country." The question also asks whether the taxpayer is required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) to report that interest or authority. The FBAR is a different form, independent of Schedule B or Form 1040 in general, but with nearly identical definitions and requirements. In fact the instructions to Schedule B direct the taxpayer to refer to the FBAR for additional information. If the answer to Question 7 is "yes," the taxpayer should plan on filing an FBAR as well.
A U.S. person must file an FBAR by June 30 of the following year if the aggregate value of the foreign financial accounts in which the person has a financial interest or or over which the person has signature authority exceeds $10,000 at any time during the reporting year. A U.S. person who is the owner of record or holder of legal title, or is able to control the owner of record or holder of legal title, of a foreign financial account meets the definition of having a "financial interest." Signature authority is defined as the authority (alone or in conjunction with another) to control the disposition of assets held in the account by communicating to the institution that maintains the account.
Depending on how the foreign asset came to be owned by the taxpayer, Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts may be required. This form is referenced in Question 8, Part III of Schedule B to Form 1040, which asks whether the taxpayer received a distribution from, was the grantor of, or was the transferor to, a foreign trust. U.S. persons who, among other things, received either (1) a gift or bequest of more than $100,000 from a nonresident alien individual or a foreign estate or (2) a gift of more than $15,102 from a foreign entity, must file Form 3520.
Another potentially required form is Form 8938, Statement of Specified Foreign Financial Assets, which accompanies the personal income tax return. The requirements for this form are similar to the requirements for an FBAR; in fact, the IRS has published a Comparison of Form 8938 and FBAR Requirements. In short, Form 8938 is required when a U.S. person has a foreign financial asset, including a foreign financial account, worth more than an applicable threshold, which thresholds are summarized on page 2 of the instructions.
While this discussion has focused on the reporting requirements applicable to foreign financial accounts, the following instructions for Form 8938 are instructive in providing an idea of what is required when dealing with other kinds of assets:
"You do not have to report any asset on Form 8938 if you report it on one or more of the following forms that you timely file with the IRS for the same tax year.
- Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
- Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations.
- Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
- Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
- Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans."
Source: Carolyn Reers, U.S. Tax Compliance for U.S. Persons With Interests in Foreign Accounts, Trusts, Corporations and Partnerships, ST008 ALI-ABA, September 2011.
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