IRS Tax Forms That Expats Need to File

With all of the talk about President Trump’s tax changes and the filing deadline of April 15th fast approaching, I wanted to publish an article about some of the Offshore Filing Requirements for 2018. The article covers the top 3 forms that expats must generally file, based on my experience living and working abroad for the past 23 years. These common forms are the FinCEN 114 (formerly the FBAR TD F 90), the 8938, and the 5471.

Several other forms are also described below. These are also fairly common for expats and offshore business owners. They include some of the standard forms for corporations, trusts, as well as the reporting of certain international transactions. Please take a minute to review your U.S. filing requirements for U.S. citizens living, working, and investing abroad right now. The penalties for failure to file are severe, so make sure that you get it done.

Here’s the disclaimer.   I am not an accountant.   I am not a tax lawyer.   This is not tax advice.   This is an article about my experience, what kinds of forms I file, and what forms many friends, associates, and colleagues of mine file on an annual basis. Your situation may be different, so please check with a tax lawyer or accountant to verify any and all filing requirements that you may have. At the end of the article is a link to some professionals who may be able to assist you with your responsibility.

No relief in sight. There was a time we thought the offshore filing requirements would be eliminated when Trump changed the foundation of international tax law for corporations. Where U.S. corporations with divisions abroad were taxed on their worldwide income, they are now only taxed on U.S. source income. That is, to say, the United States moved from a worldwide tax system for multinationals to a residency-based tax system.

We had hoped that individuals might also move to a residency-based system. That those of us living abroad would no longer be taxed on our worldwide income. That we would be placed on the same footing as large corporations. But, this didn’t happen. The bottom line for 2018 is that there is no change to the filing requirements for individuals.

The United States tax system still operates on the principle that U.S. citizens and residents are taxed on their worldwide income. To enforce these laws, the IRS has imposed various filing obligations backed up by draconian penalties for those who fail to comply.

Below is a summary of the most common filing requirements and possible penalties. None of these have changed under President Trump’s tax system.

Also, at the end of the column this week you’ll read a note from a reader about the Trump tax article and some follow-on thoughts. You’ll also see some links to stories that readers sent about their experiences on Little Corn Island, Nicaragua. The reader’s response was fantastic. It was great to see some photos and storyboards of other folks’ trips to the island. Hope that you enjoy them, too.

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. This rule also requires anyone with multiple accounts with an aggregate average balance of all accounts above $10,000 to file as well.

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.

FYI… the name for this form changed from TD F 90-22.1 to FinCEN Report 114 in 2013. This, and the fact that those of us in the business still refer to it as the FBAR, has caused some confusion around the web.

When to File

You should file your FBAR and most foreign returns (described below) with your personal return on April 15. If you have a foreign trust, Forms 3520 and 3520-A are due on March 15.

You might choose to hold your foreign structure in a U.S. corporation. This moves most of the reporting off of your personal return and on to the corporate return. In this case, the foreign entity forms are due March 15 and are attached to the U.S. corporation’s Form 1120.

If you extend your personal return using IRS Form 4868 to October 15, most foreign forms are also extended. To extend a foreign trust or a structure in a U.S. corporation, you need to file IRS Form 7004 by March 15.

Corporate and Trust Filing Requirements

There are a number of filing requirements for international corporations and 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 must be filed by U.S. persons (which includes individuals, partnerships, corporations, estates, and trusts) who own a certain proportion of the stock of a foreign corporation or are officers, directors, or shareholders in Controlled Foreign Corporation (CFC). 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. http://www.irs.gov/pub/irs-pdf/f5471.pdf
• 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). http://www.irs.gov/pub/irs-pdf/f8832.pdf
• 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 that this form is not filed. http://www.irs.gov/pub/irs-pdf/f8858.pdf
• Form 3520 – Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. 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. http://www.irs.gov/pub/irs-pdf/f3520a.pdf
  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. http://www.irs.gov/pub/irs-pdf/f3520.pdf

• 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 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.http://www.irs.gov/pub/irs-pdf/f5472.pdf
• 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.http://www.irs.gov/pub/irs-pdf/f926.pdf
• Form 8938 – Statement of Foreign Financial Assets is new for tax year 2011 and must be filed by anyone with significant assets outside of the United States. Who must file is complex, but, if you live in the U.S. and have an interest in assets worth more than $50,000, or you live abroad and have assets in excess of $400,000, you probably need to file. If you are a U.S. citizen or resident with assets abroad, you must consult the instructions to Form 8938 for more information. Determining who must file is a complex matter.

I hope you have found this summary helpful. Again, it’s meant only as a review of the basics. If you are in need of an international tax expert, please contact us here for a referral list of tax professionals who can assist you in the correct preparation and filing of all the forms you are required to file.

READER FEEDBACK – TAXES: Also included this week is some reader feedback from the last couple columns. The first is a response to the tax article last week from a reader and business owner. He says,

Hi Mike,

Just got back from a mini-tax seminar with 400+ people trying to make sense of the new tax bill. I think your advice for those who do not own a business stateside is pretty much dead on. There are winners and losers in the new tax bill, but overall, I doubt that it changes your mind about becoming an American living abroad.

If you own businesses, well….  There’s some work to be done.

At the current 30-day view, some businesses are going to need to look at a different way of being a “pass-through” entity to maximize the new and difficult QBI (Qualified Business Income) rules and regulations. This was created to regain the “gap” between corporate rates and LLC/ S. Corp. rates. It’s worth it for many. But it’s a different world.

And for those who had aspirations of selling their business(es) in the coming 8 years, you will need to plan carefully for that inevitability. A longer-term view of capital appreciating in a C Corporation could be a good strategy when you go to sell it as a stock sale. The rules for asset sales have changed, and it’s not favorable, so the old game of assets + goodwill may not work anymore. We are taking a step back as an M&A acquirer and making sure our strategy is sound.

The best advice for business owners:  Next time you are home, plan a day with your CPA. Or two. It will be well worth it.

–    Robert  J.  Nashville, TN

READER FEEDBACK – CORN ISLAND  

We received a few responses from folks who enjoyed the Little Corn Island Piece by Amanda Cobb. Take a look here at a couple links to stories that readers sent in about their experiences on Little Corn Island, Nicaragua. One is a family vacation over Christmas and the other a volunteer group from Wisconsin and their work on the island. Both are great follow-ups to last week’s column and add a depth of vision to the story Amanda told of her time there with the Cobb family.

Kim’s Christmas Vacation on Little Corn

This is a picture log of a family vacation on Little Corn. Kim says it’s “cheesy,” but I loved it, and many of you will too.    

Amy’s volunteer work group in Little Corn

Here is a part of the story from Amy and her group’s work on Little Corn.   

Below is part of an autobiography of her mom, and her passion for the work in Nicaragua. It’s great stuff about life after retirement, how she’s found meaning, and why she did and does what she does.

My past twelve years had plenty of bumps along the way, as I learned the challenges and pitfalls of non-profit work. Thanks to the continuous guiding forces provided by my husband and other mentors, the slogan I coined when first taking on the W/NP director’s position, “Working together, we make a difference,” continues to be meaningful still. Today, partnering and making a difference are buzz words, but back in 1991, that wasn’t true. W/NP still uses that phrase as we work to make friends for America. The greatest asset that Partners has is providing opportunities for the common person to be working with someone from another country on an equal basis. And best of all, one doesn’t need a doctoral degree to be involved at the international level.

Retirement happened last March, 2003, but cutting out Partners would be like discarding one of my children. I have returned somewhat to the fiber world, but international development will continue as a mainstay of my life. People continue to ask, “Just how do you think you can change the world?”  My answer, I am not changing the world, but I can make it a better place for at least one other person. If everyone would do just one thing, it would be like grains of sand on a beach. One grain doesn’t really mean anything, but many together can make a beautiful place to reside.

We, who are born in the U.S., are so fortunate, we have so much – but do all those material things really mean that much? We must continue to raise that level of awareness of the plight of so many people throughout the world. That must be first to our friends and neighbors. People in developing countries find themselves in terribly challenging circumstances – not through anything they did, and many times, if we look far enough, we find that we might have caused it. The saying that when we sneeze, our neighbors in developing countries get pneumonia has become very real in my life.

My loom still stands with the piece I was working on when I became employed by W/NP. It is called “Bits and Pieces,” and it is the story of life. Twelve years ago, I warped my loom to make three rugs and a wall hanging. The rugs have been used on our floors for years, but the last piece remains to be completed. For the weft, I used beautiful and some not so beautiful yarns; some spun from wool from my own sheep, some were colored (having been dyed), some had been moth-eaten, others shorn from my dear friends in my barnyard, no discrimination – black, grey, white, and brown. Some yarns were thin and sleek, others lumpy and bumpy. Some were from those who I had taught spinning, others were discards from the weavers in my classes (in this household, nothing is discarded). 

By putting all these various colors, textures, good, and bad together, I found I had a composite of life. We have good stuff in our lives, but also there are moth holes, bumps, lumps, and other bad things we want no one to see, beautiful bright colors and probably ugly dull colors. Put it all together in a weaving, and you have a lovely piece that would grace the home of a king. People are the same, made up of bits and pieces, and we must all be proud of what we are, who we represent. The good and bad together make a well-rounded person. The wall hanging is almost finished, but it remains on the loom. When will it come off?   That is a question I cannot answer

As I look back on my life, I also see the bits and pieces of a multitude of experiences. Did W/NP dominate my life? You bet, and my family will confirm that. Did motherhood dominate my life? Of course, and I am proud of it. Yes, there is a myriad of holes, moth-eaten areas, and a large assortment of lumps and bumps. I also have had so many tremendous opportunities; so many wonderful friends, both here in Portage County and all over the world, the most accepting husband, supportive family (that now includes 12 grandchildren), and a mom that anyone could wish for. I am, indeed, fortunate!

“In this new day:

I will be enthused and preserving,

I will use common sense,

I will have fun,

I will love and respect my family and friends,

I will always try to do the next best thing,

I will behold God beholding me and smiling, and smile back.”

Michael K. Cobb is the CEO and co-founder of ECI Developments which has properties throughout Latin America. He speaks all over the world on international real estate and is a board member of the National Association of Realtors.

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