Federal benefits and tax expert, Ed Zurndorfer, outlines what is required for individual taxpayers who have received taxable interest and dividends, owned a foreign account, or received distribution from a foreign trust.
Individuals during 2020 who: (1) Received over $1,500 of taxable interest or ordinary dividends; (2) owned a foreign account; or (3) received a distribution from or were a grantor of or a transferor to a foreign trust, are required to complete Part III of Schedule B of IRS Form 1040 (shown below from the 2020 Schedule B) Individuals who do not comply with the reporting requirements may be subject to civil and/or criminal penalties.
The following is a list of the reports or forms that may have to be filed in case of foreign account ownership and receipt of foreign trust distributions:
FinCEN Report 114 – Foreign Bank Account Report (FBAR)
This form is filed if an individual had a financial interest in or a signature authority over a financial account located in a foreign country. FinCEN Report 114 FBAR is not required to be filed under either of the following conditions: (1) the aggregate value of all foreign accounts is less than $10,000 at all times during the year; or (2) the accounts are held in a U.S. military banking facility located overseas.
Note that FinCEN Report 114 FBAR is not attached to IRS Form 1040. Instead, it must be filed electronically using the BSA e-filing system located at http://bsaefiling.fincen.treas.gov. The 2020 FBAR due date is April 15, 2021. An automatic six-month extension is allowed. FinCEN Form 114a may be used to authorize a tax preparer to submit the FBAR. There are severe penalties for not filing FinCEN Report 114 FBAR.
Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
IRS Form 3520 is filed along with Form 1040 to report (1) certain transactions with foreign trusts; (2) ownership of foreign trusts; and (3) receipt of large gifts or bequests from certain foreign persons. Form 3520 (part of which reproduced below) is due on the date that the individual’s income tax return is due, including extensions.
Form 8938 – Statement of Specified Foreign Assets
Individuals who hold interests during the year in specified foreign financial assets with a total value over the reporting threshold must report information about these assets on IRS Form 8938. Form 8938 is filed with an individual’s Form 1040. The following is a copy of the first part of 2020 Form 8938:
In particular, Form 8938 is required to be filed if the total value of all specified foreign financial assets of an individual living in the U.S exceeds $50,000 ($100,000 if filing as married filing joint) as of December 31, or $75,000 ($150,000 if filing as married filing joint) at any time during the year.
There are higher Form 8938 filing thresholds for individuals living abroad, as summarized in the following table:
Form 8938 Filing Thresholds
Form 8938 filing requirements do not replace or affect an individual’s obligation to the FinCen Report 114 FBAR (see above). Individuals must file each form for which they meet the relevant reporting threshold as the forms are not mutually exclusive. But an individual who is not required to file an individual income tax return (Form 1040) (because of not meeting the income filing threshold) is not required to file Form 8938.
Failure to file Form 8938 may result in a penalty of up to $10,000 plus an additional $10,000 for each 30 days of non-filing up to 150 days after IRS notice to disclose, resulting in a potential maximum penalty of $60,000. Criminal penalties may also apply.
A specified, foreign financial asset is either:
(1) a financial account maintained by a financial institution that is not a U.S. entity; or
(2) any of the following assets not held in an account maintained by a financial U.S. institution:
(a) stocks or securities issued by someone who is “not a U.S. person”;
(b) financial instruments or contracts issued by someone who Is “not a U.S. person”; and
(c) interests in a foreign entity including partnership, trust, estates, certain retirement plans and annuities. Someone who is “not a U.S person” includes individuals living overseas or individuals living in the US but who are not US citizens or resident aliens. Note that interest in a Social Security-type pension, social insurance or other similar program of a foreign government is not considered a foreign financial asset.
Individuals who have questions about filing FinCen Report 114 FBAR, Form 3520 and Form 8938 are highly advised and encouraged to seek professional tax advice.