Sometimes taxpayers are unaware that they have foreign reporting requirements. When discovered, they may need to catch up. In this blog, we will look at the hypothetical story of Antoine, a French citizen, living in the United States for more than 20 years.
Antoine moved to the United States as an employee of a multinational corporation 25 years ago. He is married to a U.S. citizen, and they have two children. Because he has lived in the United States for so long and raised his family here, Antoine plans to retire in the States. However, he still loves his homeland and visits France often.
He has two foreign bank accounts, an investment account, foreign mutual funds, and a retirement account in France. Antoine has prepared his own tax returns, but unfortunately was unaware of the requirement to report the highest balance in these accounts every year to the U.S. Treasury Department. He also did not realize that because he is a U.S. permanent resident, income from his foreign accounts and investments had to be reported on his U.S. tax return. Finally, he had no idea that foreign mutual funds are considered Passive Foreign Investment Companies (PFICs) with special reporting and tax consequences.
Since Antoine’s failure to report foreign income and accounts was not willful, he does not need to enter the Offshore Voluntary Disclosure Program (see our blog post on this topic for more information). He has unreported foreign income, however, so he cannot use the Delinquent International Information Returns Submission Procedures. The best course of action for Antoine to become compliant is to file under the Streamlined Domestic Offshore Procedures.
Under these procedures, Antoine would have to file FinCen Form 114 (Report of Foreign Bank and Financial Accounts, also known as the FBAR) for the past six years. This report is submitted directly to the U.S. Treasury and includes a list of all foreign bank and investment accounts, the address of the financial institution, account number, and highest balance in the account during the year. He will also need to amend the past three years of U.S. tax returns to report his foreign income, include Form 8938 to report the highest balance in each foreign account, and file Form 8621 to report the foreign mutual funds, which are considered PFICs. Any additional taxes and interest due on the amended returns will need to be paid. Finally, Antoine will need to file Form 14654 and pay a 5% penalty on the highest aggregate balance of his foreign bank and investment accounts over the past six years.
It may sound like a lot of work, but we can help taxpayers like Antoine get back on track. If you have questions about your tax situation, give us a call and let one of our international tax specialists help you find the answers.
By Denise Coyle, CPA