The United States tax system has specific and detailed international tax and reporting laws regarding U.S. ownership of foreign businesses, assets and bank accounts. Hone Maxwell LLP has the tax law and international experience to help clients navigate the myriad of rules and comply with U.S. international tax and reporting regulations. In addition to helping clients avoid penalties, HMLLP’s attorneys work with local tax advisors to ensure optimum tax planning across multiple countries. HMLLP attorneys provide comprehensive guidance that includes both the technical counsel and compliance requirements to make sure the taxes are properly calculated and reported.
U.S. citizens’, residents’ and deemed residents’ income is taxed by the U.S. no matter where in the world it is earned. Assets, bank accounts, income or business activities outside of the U.S. also carry imperative filing and reporting obligations, which have extreme penalties for non-compliance. In addition, there are certain tax reporting requirements for a dual-status alien, which is when a person was both a U.S. resident alien and a nonresident alien in the same tax year for tax purposes only.
The IRS has made foreign tax on income and activities a top priority, resulting in more audits, additional scrutiny of international transactions, increased penalty assessments and criminal prosecutions for failing to report assets or activities properly. In certain circumstances, if an international taxpayer fails to file even one required document with their income tax return, the statute of limitations will never begin on that return – meaning the entire tax return is open to IRS scrutiny indefinitely.
From the Foreign Account Tax Compliance Act (FATCA) to the Report of Foreign Bank and Financial Accounts (FBAR) to Global Intangible Low-Taxed Income (GILTI) compliance, HMLLP’s international tax lawyers provide the guidance needed to ensure compliance and minimize risk. HMLLP attorneys are also well-versed in the Amnesty Programs available to those facing non-compliance issues.
U.S. International Compliance can be overwhelming. There are constantly changing laws, multiple forms and the threat of severe penalties for non-compliance. It is essential to work with an international tax lawyer who understand the technical rules and regulations and the compliance and reporting that is required.
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The form most associated with FATCA is the FBAR, which is actually FinCEN Form 114. The FBAR is required when foreign bank accounts, owned directly or with signature authority, have a cumulative value of greater than $10,000 at any one time. The penalty for non-compliance ranges from $10,000 for a non-willful offense to 100% of the account balance for willful non-filing.
When Americans own a foreign corporation, there is required reporting, usually utilizing Form 5471. Generally, this form is necessary when Americans control a foreign corporation or dispose of/acquire 10% or more stock in a foreign corporation. The penalty for not filing is $10,000, but the statute of limitations never runs on the entire tax return until the form is filed. Further, this form can signal additional requirements such as GILTI, the FBAR or other statements.
When ownership of a foreign corporation does not rise to the level of control, the investment can still be considered a passive foreign investment company (PFIC). Form 8621 reports PFICs, related income and possible elections to minimize tax. As with Form 5471, it carries a penalty of $10,000 for not filing and the statute of limitations does not run on the entire tax return until it is filed.
We refer to Form 3520 as the “catch-all” form. Several situations are reported on this form, from transactions with foreign trusts to gifts/inheritances received from foreigners. The penalties can be 25% for gifts/inheritances and up to 35% of the transaction or trust for activities with foreign trusts.
American owners of foreign trusts must report income from the trust on this form. If the form is not filed, a penalty of 5% of the value of the trust can apply.
GILTI is a new anti-deferral rule enacted beginning in 2018. Despite the word “intangible” in the name, it is calculated based on a return on depreciable assets. Even if there is no GILTI tax, there is substantial reporting to be completed, and individual taxpayers may be able to make a Section 962 election to minimize the tax consequences.