With the global trend to greater transparency, scrutiny of assets held outside the country in which the owner resides is growing rapidly. Reporting requirements are stricter and more demanding for U.S. citizens and residents with bank accounts, trusts or other assets outside the country. Financial institutions outside the U.S. are now required to report financial accounts held by U.S. taxpayers, raising the risk that non-filers will get caught.
Financial Accounts Outside the U.S.
As specified by the Bank Secrecy Act, U.S. persons must use Form 114a to report non-U.S. financial accounts that exceed certain thresholds to the U.S. Treasury. This applies to any U.S. person with a financial interest in or signature authority over at least one financial account located outside the U.S. “Financial accounts" include bank or brokerage accounts, mutual funds, trusts and other financial accounts.
A “financial interest" includes an owner of record, an agent for an owner of record, a trust or a non-U.S. entity in which a U.S. person owns more than 50%. Trustees should consult with an attorney due to the lack of clarity as to who has a financial interest in a trust and who is responsible for filing. Owners and beneficiaries of individual retirement accounts (IRAs) or qualified retirement plans aren't considered to have a financial interest.
Form 114a must be filed electronically by April 15. This applies for any year when the total value of all relevant accounts exceeded $10,000 at any time. For grantor trusts, only the grantor must file. For non-grantor trusts, any beneficiary with more than a 50% beneficial interest must file. Penalties for failure to file can include penalties up to the greater of $100,000 or 50% of the account value, and potentially criminal consequences.
The Foreign Account Tax Compliance Act (FATCA), is a further step in the U.S. government's war on offshore tax evasion, and imposes additional, extensive reporting requirements for individuals, entities and trusts that own financial assets outside of the United States. Under FATCA, U.S. persons with an interest in “specified foreign financial assets" (i.e., any financial instrument issued by a non-U.S. person, including financial accounts and securities) must file IRS Form 8938 annually if the value of these assets exceeds $50,000 (single) or $100,000 (married) at year end, or if the value exceeds $75,000 (single) or $150,000 (married) at any time during the prior year.
Non-U.S. Trusts and Gifts
U.S. citizens and resident aliens are required to notify the IRS if certain “reportable events" occur. These events include situations when:
A U.S. person forms, transfers cash or assets to, takes a loan from, or receives a distribution from a non-U.S. trust
A U.S. person receives a gift greater than $100,000 from a non-U.S. individual, or greater than $15,601 from a partnership or corporation (Gifts from related individuals or entities must be aggregated to determine if they meet the threshold)
Such events are reported to the IRS using Form 3520, which should be included with the U.S. taxpayer's income tax return. Failing to do so can result in significant penalties.
Additionally, if a U.S. person is the grantor of a non-U.S. trust, or has added funds to a non-U.S. trust with U.S. beneficiaries, the trustee must file Form 3520-A. This form discloses the income and expenses of the trust, and includes a balance sheet listing all the assets and liabilities. If the non-U.S. trustee does not do so, the U.S. grantor must — or else penalties will be incurred.
The New Reporting Regime: FATCA and CRS
In addition to the burdensome reporting requirements for people who own assets outside their home country, governments around the world are now looking to financial institutions as watchdogs over "offshore" assets.
Under FATCA, non-U.S. financial institutions must report to the IRS (either directly or through the foreign country's tax authority) financial information for accounts of U.S. taxpayers and for non-U.S. entities in which U.S. taxpayers hold a substantial interest. The U.S. imposes a 30% withholding “penalty" on payments from U.S. sources to non-U.S. financial institutions which don't comply with this reporting.
Under the FATCA regime, a series of intergovernmental agreements (IGAs) have been entered into with various countries, some of which are reciprocal, meaning that the U.S. will exchange certain information with the IGA country with respect to its tax residents.
FATCA's broad reach, punitive actions and failure to achieve equivalent levels of reciprocity with partner jurisdictions have been widely criticized. However, the challenges to FATCA haven't resulted in significant changes.
Building upon the regulatory framework created by FATCA on a global basis, the Organization for Economic Cooperation and Development developed the Common Reporting Standard (CRS). There are currently over 90 countries in the developed world, including all of the major offshore financial centers, signed up to CRS. Reporting will begin in 2017 and 2018. Notably, the United States isn't currently a participant in CRS. However, some U.S. citizens will still be subject to CRS depending on the location of their assets and their current residence.
The complexity of managing wealth internationally continues to grow, making it essential that a multinational family's advisors remain in close communication. While staying abreast of the intricate and ever-evolving rules for reporting non-U.S. assets is difficult, it's an important aspect of preserving the family's wealth and ensuring that it can be passed on to the next generation.