Filing Requirements For Americans With Offshore Assets

Next week (April 15) is T-Day—that is, Tax Day—in the United States.

If you’re living outside the States, you have an automatic filing extension until June 15; however, any taxes due still must be paid by April 15 to avoid penalties. You also have the option of applying for a six-month extension, pushing your filing deadline to Oct. 15, even if you’re not living outside the United States. Again, though, taxes owed are still due by April 15.

If you are living outside the States, you can request yet another two-month extension from the Oct. 15 extension if you can show a good reason why you need the additional time.

Because the tax system in the United States is probably the most complicated in the world. Even simple wage-earners with but single W-2s can have trouble figuring out which forms to complete thanks to things like the Earned Income Credit (not to be confused with the Foreign Earned Income Exclusion).

If you have any offshore activity, your filing burden becomes greater. If you have an offshore bank account, you have one or two additional forms to file. If you have multiple entities and investments, you could be looking at dozens of additional filing requirements.

The two main forms an American with any offshore activity should be aware of are the FBAR and Form 8938. FBAR stands for Foreign Bank Account Report. This is the form that any U.S. person with offshore bank accounts (one or more) that have an aggregated balance of US$10,000 or more at any point during the previous calendar year must complete. That’s straightforward enough. Note, though, that you can also fall under the FBAR filing requirements if you are a signatory on an account but not a financial beneficiary (if, say, you’re a signatory on your parent’s account).

One question I’m asked often is whether offshore bank accounts owned by an IRA are reportable by the individual on an FBAR form. The answer is no; bank accounts owned by an IRA aren’t reportable on the FBAR form.

A corollary to that question is to do with reporting requirements for offshore entities owned by an IRA. Are they reportable on Form 8938? Those entities aren’t reportable by the IRA beneficiary, but by the IRA custodian. So, no, no need to include IRA-owned entities on your Form 8938.

Form 8938 is one of the consequences of FATCA. It was created to capture information about any and all foreign financial assets not required to be reported on the FBAR. Foreign financial assets include shares and bonds of foreign entities as well as bank accounts. So, yes, you get to report bank accounts twice if you meet the thresholds for Form 8938 (that is, if you have US$50,000 or more of foreign financial assets at the end of the year as an individual). The number doubles for married couples and goes up to US$200,000 and US$400,000, respectively, if you’re not living in the United States.

So a single bank account with US$50,000 in it at the end of the year (compared with the “at any time during the year” requirement for the FBAR) can trigger both the FBAR and Form 8938.

When and where to file those forms adds to the complexity. Form 8938 is filed with your tax return, which, as mentioned above, is due next Tuesday unless you’re eligible for or file for an extension.

The FBAR isn’t due until June 30 and isn’t sent to the IRS but to a different branch of the U.S. Treasury called the Financial Crimes Enforcement Network (FinCEN). The fact that Americans holding foreign bank accounts now must report annually to FinCEN gives you an idea of what the U.S. government thinks of anyone engaging in international business or investing offshore.

In addition, starting this year, you must file your FBAR electronically…and the system they’ve created for that purpose will add an extra hour to your tax-preparation time. It is not what you might call user-friendly.

You can go to this IRS website page for more information on filing the FBAR and Form 8938.

Good luck.

Lief Simon

“Lief, this article from you on politics overseas is over simplistic“.

“First time Ortega took Nicaragua there was La Piñata, wherein politicians took properties from wealthy Nicaraguans and divided amongst the Communist elite. In Cuba the situation was never resolved and this has been going on since 1959. Argentina is in flames, and my Argentines friends can’t seem to be able to live there. I would say that with all of your investments and money diversified in different countries, your advice works only for wealthy people like you. But advising to a retired senior citizen not to worry about a drastic change in government and that it has no implication is an irresponsible act from your behalf.”

D.F.

Overly simplistic? Well, sure. It’d be tough to address every aspect and nuance of politics in every country in the world in a free e-letter essay.

But that’s the point. You can’t worry about something you can’t have any effect over. All you can do is to organize your life so that you don’t have to worry about things like local politics. Argentines, for example, are masters at diversifying their wealth outside of their home country. And any expat who has a clue maintains the bulk of his wealth outside the country where he’s living.

You don’t have to be “wealthy” to diversify your life and your assets globally. I had very limited wealth when I started “going offshore.” It was thanks to going offshore that my wealth expanded.