Expat Tax: US Tax Filing for International Bank Accounts and Businesses

Due to the great response from the last article on tax issues for American expats, I have included another article on the subject.  This one is an article on one of the most misunderstood areas of international business and asset protection - U.S. tax filing and reporting requirements.

As many expats with portable careers own their own businesses, this article reviews their basic requirements for tax filing and reporting.  The article's author and guest blogger Chris Rusch of Rusch Law recommends that you consult an international tax expert as to how these requirements may fit your particular situation.

One of the foundations of the United States tax system is that U.S. citizens and residents are taxed on their worldwide income. When handled properly, an asset protection structure is tax neutral, meaning it does not increase, decrease or defer personal income tax. In contrast, an active business, conducted outside of the United States, may have significant tax deferral and savings opportunities.

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.

Corporate and Trust Filing Requirements

There are a number of filing requirements for IBCs and International 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 (CFC) 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).

1.    A foreign corporation is a CFC if at least 50% of either the total voting power or total value of the stock of the foreign corporation is owned by U.S. persons, each of whom owns at least 10%. Stock held by family members is grouped together for the 10% test.

2.    A U.S. Shareholder of a CFC may be taxed on his proportion of earnings even if the foreign corporation does not distribute them. Basically, a CFC is treated as an S-Corporation or pass-through entity for U.S. Reporting.

3.    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:
1.    Creates or transfers money or property to a foreign trust,
2.    Receives (directly or indirectly) any distributions from a foreign trust, or
3.    Receives certain gifts or bequests from foreign entities.

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.

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.

As mentioned above, this article has been authored by Chris Rusch is a California licensed attorney who has represented clients before the IRS in many states. His practice is focused international taxation, foreign corporate formations, and resolving complex tax controversies. It is simply a review of the basic filing requirements and is not intended to be tax advice specific to your situation. Chris encourages you to use a professional experienced in international tax to prepare your returns.

YOUR EXPAT SUCCESS TIP: If you are an American expat with international bank or brokerage accounts, an international business or corporate trust, be sure you are filing your taxes appropriately to take advantage of savings opportunities and avoid penalties.

YOUR THOUGHTS? Did you find this article helpful?  Do you struggle with these tax issues?  Please share your experience with us.

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