Tax Reporting for US Persons Abroad
As we have discussed in other Insights, US taxpayers abroad are in a unique position as the US imposes taxes, even though they are not US residents. This citizenship-based taxation differs from most countries that have residency-based taxation.
To add insult to injury, US persons have burdensome tax reporting requirements, with even more burdensome penalties for non-compliance. This Insight focuses on three important reporting requirements: FBAR, Form 8938, and Form 5741.
FBAR—Report of Foreign Bank and Financial Accounts
The FBAR came about in 1970 as part of the Bank Secrecy Act to combat money laundering, tax evasion, and similar crimes. This is probably the most common reporting requirement that US persons abroad face due to the low threshold where it becomes necessary to report. You must complete the FBAR if:
- You have a financial interest in or signature authority over a financial account located outside the United States and
- The aggregate value of foreign financial accounts exceeded $10,000 USD at any time during the calendar year
In other words, if the total balance of all your foreign financial accounts exceeded $10,000 USD for even one day during the year, you must file an FBAR within FinCEN’s BSA E-Filing System.
It is important to file as the penalty for each year of non-compliance is $10,000 (non-willful failure to file) or the higher of 50% of the account value or $100,000 (willful failure to file).
Foreign financial accounts include foreign bank accounts, business bank accounts, investments, pensions, cash value life insurance, and, for those in Singapore, CPF and SRS.*
Form 8938—Statement of Specified Foreign Financial Assets
Similar to the FBAR, Form 8938 is used to report foreign financial assets. However, the threshold for needing to file is higher, so it is less common. This amount differs based on whether you live in the US or abroad.
For example, a single person abroad only needs to complete Form 8938 if the value of foreign financial assets is $200,000+ on the last day of the tax year or $300,000+ at any time during the year. For a single person living stateside, they must report if the value of foreign financial assets is $50,000+ on the last day of the tax year or $75,000+ at any time during the year.
Unlike the FBAR which is reported via the BSA E-Filing System, Form 8938 is filed with your tax return.
Penalties for noncompliance are (surprise, surprise) substantial, amounting to $10,000 USD for failure to timely file plus an additional $10,000 for each 30-day period of not filing (beginning 90 days after the IRS sends you a failure to file notice) up to a total maximum penalty of $60,000.
Keep in mind that if you live abroad, mail can be delayed, and the notice might arrive close to or even after the 90-day mark.
Form 5471—Information Return of U.S. Persons With Respect To Certain Foreign Corporations
Some Americans abroad with an entrepreneurial spirit may see a need for a service and open a foreign company. Avrio itself was founded to meet the needs of expats wanting holistic wealth planning and cross-border advice. However, let’s not forget about the reporting requirements.
Namely, Form 5471 is used by those who own 10% or more of a foreign corporation’s stock or 10% or more of the combined voting power of all classes of stock with voting rights.
The rules and reporting requirements are complex and can easily cause a tax return to surpass 100 pages. There are strategies that can be utilized to minimize the Global Intangible Low-Taxed Income (GILTI) tax (i.e., tax on retained earnings), maximize your foreign tax credit, and handle additional considerations.
Again, penalties for non-compliance can be consequential (i.e., $10,000 USD plus an additional $10,000 for each 30-day period of not filing after the 90-day notice period up to a total maximum penalty of $60,000).
As an American abroad, it is important to be aware of your reporting requirements and be proactive to avoid headaches later on. Of note, if you are currently not in tax compliance, there are ways like the Streamlined Filing Procedures to become compliant.
We specialize in wealth planning for global citizens to help them meet their financial goals, avoid pitfalls, and advise on tax strategies.
For more information on our services, please reach out to one of our wealth planners.
*While we typically do not recommend US taxpayers participate in SRS, some employers contribute to it as part of total compensation.