Tax Filing Requirements for Americans Abroad
The United States tax system operates on the principle that U.S. citizens and residents are taxed on their worldwide income. To enforce these laws, the IRS has imposed various filing obligations backed up by draconian penalties for those who fail to comply.
Below is a summary of the most common filing requirements and possible penalties.
This can be a very complex area of US taxation and this article is meant only as a review of the basics. You should contact an expert for questions on your specific situation. If you are in need of an expat tax expert, please contact on the right for a referral.
International Bank and Brokerage Accounts
One of the most critical filing requirements is the Report of Foreign Bank and Financial Accounts. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account(s) with more than $10,000 must disclose these accounts to the U.S. Treasury.
The law imposes a civil penalty for not disclosing an offshore bank account or offshore credit card up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Note that these penalties can be imposed for each year.
In addition to filing the Foreign Bank Account form, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.
Fyi… the name for this form changed from TD F 90-22.1 to FinCEN Report 114 in 2013. This, and the fact that those of us in the business still refer to it as the FBAR, has caused some confusion around the web.
When to File
You should file your FBAR and most foreign returns (described below) with your personal return on April 15. If you have a foreign trust, Forms 3520 and 3520-A are due March 15.
You might choose hold your foreign structure in a US corporation. This moves most of the reporting off of your personal return and on to the corporate return. In this case, the foreign entity forms are due March 15 and attached to the US corporation’s Form 1120.
If you extend your personal return using IRS Form 4868 to October 15, most foreign forms are also extended. To extend a foreign trust or a structure in a US corporation, you need to file IRS Form 7004 by March 15.
Note that the due date for the FBAR is June 30 and no extensions are available. I recommend you file the FBAR along with your personal return on April 15. If you extend your personal return, your FBAR is still due by June 30.
Corporate and Trust Filing Requirements
There are a number of filing requirements for international corporations and trusts. Failure to file the required returns may result in civil and criminal penalties and may extend the statute of limitations for assessment and collection of the related taxes.
- Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations must be filed by U.S. persons (which includes individuals, partnerships, corporations, estates and trusts) who owns a certain proportion of the stock of a foreign corporation or are officers, directors or shareholders in Controlled Foreign Corporation (CFC). If you prefer not to be treated as a foreign corporation for U.S. tax reporting, you may be eligible to use Forms 8832 and 8858 below.
- A foreign corporation or limited liability company should review the default classifications in Form 8832, Entity Classification Election and decide whether or not to make an election to be treated as a corporation, partnership, or disregarded entity. Making an election is optional and must be done on or before March 15 (i.e. 75 days after the end of the first taxable year).
- Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities was introduced in 2004 and is to be filed with your personal income tax return if making the election on Form 8832. A $10,000 penalty is imposed for each year this form is not filed.
- Form 3520 – Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts is required when a U.S. person:Form 3520-A – Annual Information Return of Foreign Trust is required of any foreign trust with a U.S. Owner (Grantor). Failure to file this form can result in a penalty of 5% of the gross value of the U.S. person’s portion of the trust.
- Creates or transfers money or property to a foreign trust,
- Receives (directly or indirectly) any distributions from a foreign trust, or
- Receives certain gifts or bequests from foreign entities.
- Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation is required to be filed by a “reporting corporation” that has “reportable transactions” with foreign or domestic related parties. A reporting corporation is either a U.S. corporation that is a 25% foreign-owned or a foreign corporation engaged in a trade or business within the United States. A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.
- Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation is required to be filed by each U.S. person who transfers property to a foreign corporation if, immediately after the transfer, the U.S. person holds directly or indirectly 10% of the voting power or value of the foreign corporation. Generally, this form is required for transfers of property in exchange for stock in the foreign corporation, but there is an assortment of tax code sections that may require the filing of this form. The penalty for failing to file is 10% of the fair market value of the property at the time to transfer.
- Form 8938 – Statement of Foreign Financial Assets is new for tax year 2011 and must be filed by anyone with significant assets outside of the United States. Who must file is complex, but, if you live in the U.S. and have an interest in assets worth more than $50,000, or you live abroad and have assets in excess of $400,000, you probably need to file. If you are a U.S. citizen or resident with assets abroad, you must consult the instructions to Form 8938 for more information. Determining who must file is a complex matter.
I hope you have found this summary helpful. Again, it’s meant only as a review of the basics. If you are in need of an international tax expert, please contact us here for more assistance.
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