What Types of Foreign Investments Must I Report to the IRS on My FBAR?

As regular readers may already know, our international tax attorneys frequently write about foreign income disclosure requirements. While these requirements can be myriad – Form 5471, Form 8865, and so forth – one stands out as exceptionally important: the requirement to file FinCEN Form 114, also known as the Foreign Bank Account Report or simply “FBAR.” Just as U.S. taxpayers must file Form 1040 (or its variations) to report their domestic income, certain taxpayers must likewise file an FBAR to report their balances in excess of $10,000 U.S. which is often indicative of sources of foreign income. However, reportable offshore income is not necessarily limited to the contents of one’s foreign checking or savings accounts: in addition, taxpayers are further required to disclose various foreign investments, such as foreign mutual funds. Unfortunately for taxpayers with FBAR obligations, guidelines for foreign investment disclosures can be ambiguous, increasing the risk of inadvertent noncompliance – and aggressive penalization. To help clarify this murky subject, our tax professionals review three types of foreign investments to report on your FBAR and/or additional tax forms.

Reporting Foreign Trusts, Mutual Funds, and Life Insurance Policies to the IRS

First, we would like to emphasize that this article will primarily focus on foreign investments that can trigger foreign income reporting requirements. If you’re unfamiliar with these requirements or need a quick refresher, we would recommend following the “FBAR” link in the paragraph above, or beginning with our overviews of:

Note that, per FinCEN announcement, “[T]he due date for FBAR filings for foreign financial accounts maintained during calendar year 2017 is April 17, 2018.” However, taxpayers with unfiled FBARs have six additional months in which to do so, as the announcement continues, “Filers who fail to file their… FBAR by April 17, 2018, have an automatic extension up to October 15, 2018.”

Now that you have familiarized yourself with the fundamentals of offshore account disclosure, it is critical to learn how your foreign investments can impact or create FBAR filing obligations. Our international FBAR attorneys have compiled three examples below.

Example #1: Investments in Foreign Life Insurance

It can be financially advantageous to have a foreign life insurance policy in the same nation where you made your investments. Investments in offshore life insurance are frequently tax-free or tax-deferred, even without making distributions, depending on whether the policyholder chooses to hold or close out the policy prior to death. However, not only may such a policy trigger FBAR requirements, but may also require the taxpayer to file the following:

  • Form 720 (Quarterly Federal Excise Tax Return)
  • Form 8938 (Statement of Specified Foreign Financial Assets)

The deadlines to file Form 720 are listed below, based on which quarter is being reported:

  • January to March – April 30
  • April to June – July 31
  • July to September – October 31
  • October to December – January 31

Form 8938 must be attached to your federal income tax return, which was due April 17 unless you obtained an extension.

Example #2: Investments in Foreign Mutual Funds

Mutual funds allow investors to purchase otherwise difficult-to-obtain securities, such as stocks and bonds, by pooling their financial resources. Their convenience, flexibility, and affordability, combined with the potential for growth they afford, has made mutual funds popular investment tools for investors of all experience levels – not just in the United States, but around the globe.

If you have shares in a foreign mutual fund, or interest in shares in a foreign mutual fund, you must disclose your investments to the Internal Revenue Service (IRS) not only by filing an FBAR, but in many cases, Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund). Like Form 8938, Form 8621 should be attached to your tax return.  The bad news here is the income tax reporting on PFICs is very sophisticated and time-consuming and not something I would recommend doing yourself.

Example #3: Investments in Foreign Trusts

A trust is a collection of assets that are handled by a third party, the “trustee,” whose objective is to manage the assets on behalf of the trust fund’s beneficiary. The difference between a domestic trust and a foreign trust is that a foreign trust is neither under the jurisdiction of a U.S. court, nor do U.S. persons control major decisions about the trust. Further, a domestic trust can become a foreign trust after its establishment.

If you hold assets in a foreign trust, you must disclose them by filing an FBAR. In addition, you must also file a timely Form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner (Under section 6048(b)). Per IRS filing instructions, Form 3520-A is due “by the 15th day of the 3rd month after the end of the trust’s tax year.”

International Tax Law Attorneys Handling FBAR and FATCA Compliance Issues

Foreign trusts, foreign mutual funds, and foreign life insurance policies constitute just a few examples of the numerous foreign assets which must be reported to the U.S. government. Additional examples include interests in foreign retirement plans, foreign stocks and securities, foreign rental property and offshore businesses. The lesson for taxpayers? It is difficult to be “too careful” when disclosing offshore income to the IRS – and conversely, very easy to incur FBAR penalties and many others… for disobeying the law, even inadvertently.

If you own, maintain, or control offshore bank accounts, stocks and bonds, trusts, mutual funds, or other assets and investments abroad, ensure that your foreign information and foreign income compliance bases are thoroughly covered: get dependable foreign tax guidance from a tax attorney and former public auditor with over 20 years of experience representing California residents, U.S. expatriates, dual citizens, and citizens abroad. The Tax Law Office of David W. Klasing assists taxpayers with FATCA and FBAR compliance, foreign account tax audits, international estate planning, offshore voluntary disclosures, and related tax matters. To schedule a reduced-rate consultation, contact our tax firm online or call us today at (800) 681-1295.

If you find that you are out of compliance as to offshore foreign information and income reporting, we are very experienced at streamlined and offshore voluntary disclosures in order to minimize penalties and any potential criminal tax and information reporting exposure.   The following video explains this exposure very nicely.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

Here are very helpful Q and A libraries on the subject:

https://klasing-associates.com/topics/ovdi-faq/

https://klasing-associates.com/topics/fbar-compliance-and-disclosure-faq/

https://klasing-associates.com/topics/foreign-audit-faq/

https://klasing-associates.com/topics/ovdp/