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REMINDER: Different Rules, Requirements, and Deadlines Can Apply for Taxpayers with Foreign Connections

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As tax season winds down, individual taxpayers and their accountants usually breathe a large sigh of relief on April 15 (or, this year, April 18): Unless due dates for returns are properly extended, they will generally (and hopefully) be filed by the aforementioned deadline.  However, filing becomes more complicated for taxpayers with international ties: there are both variances in due dates and requirements separate from a traditional tax return.

First, for United States citizens or residents who are residing overseas on the due date for Form 1040 in a given year, the deadline is not April 15; an automatic two-month extension is provided by the Service, for which no formal extension request is required.  This automatic extension is available even where, for example, the taxpayer residing overseas will be filing a joint return and his/her spouse is living in the United States on April 15.  Of note, however, is that this extension for filing the tax return does not alleviate the requirement to pay any taxes owed by April 15 (or the applicable due date in the given year); where taxes owed are not timely paid, interest on tax amounts accrues.

Filing requirements separate from what are required for taxpayers with only domestic holdings often exist for individuals with foreign holdings (whether they reside domestically or overseas). The most common (and most publicized) is FinCEN Report 114, commonly referenced as the FBAR.  United States persons with financial interests in or signature authority over foreign financial accounts must disclose their foreign holdings on the FBAR if the aggregate value of such accounts exceeds $10,000 at any time during the calendar year.  Reporting requirements exist for United States citizens, residents, entities (corporations, partnerships, and limited liability companies), trusts and estates.  “Foreign financial accounts” include a wide assortment of accounts, including some insurance policies and mutual funds.  As one can imagine, FBAR filing requirements are comprehensive, and can sometimes cover assets for which a taxpayer does not expect to maintain a reporting obligation.

Importantly, the FBAR filing requirement exists separate from the tax return requirement; to this end, filing an extension for an individual’s tax return does not grant a corresponding extension for the FBAR.  FBARs required for 2015 must be filed by June 30, 2016, with no extensions available.  

As to the individual’s tax return itself, numerous forms can be required where foreign assets exist.

  • Form 8938 is required to be filed with the tax return where foreign assets meet threshold amounts; filing requirements for Form 8938 are largely similar to the FBAR, but do have some important distinctions.
  • Form 3520 can be required to report bequests or gifts from foreign individuals, and to report certain interests in foreign trusts.
  • Form 8621 is used to report interests in passive foreign investment companies; importantly, this typically includes interests in foreign mutual funds (amongst other assets).
  • Certain interests in foreign corporations and partnerships are required to be filed on Forms 5471 and 8865, respectively.

As one may expect, failure to file any of these forms where required can subject the taxpayer to substantial penalties.

Reporting requirements for individuals with foreign ties are typically fact-specific.  Numerous unique reporting obligations can exist; many of the required forms have come into relevance only in recent years.  Many of these forms can be foreign (for lack of a better term) even to well-versed practitioners; thorough assessments for taxpayers with overseas assets by tax professionals experienced with reporting foreign property interests is essential.

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