Today, business is more global than ever, and American citizens have more international assets than at any time in the past. As a result, the U.S. Congress passed the Foreign Account Tax Compliance Act in 2010, and the Internal Revenue Service (IRS) increased the disclosures required regarding offshore assets, seeking to increase tax revenues and curb offshore tax evasion. In light of this increased attention and reporting obligations, it is more important than ever to ensure you are in compliance with your international tax reporting obligations. At the Ben-Cohen Law Firm, our Los Angeles tax specialists have the experience to assist you with foreign asset tax issues, whether you are a U.S. citizen with foreign assets or a foreign national doing business in the United States. We utilize the expertise of both an attorney, certified by the State Bar of California Board of Legal Specialization as a Taxation Law Specialist, and a licensed Certified Public Accountant (CPA), to advise you on the complex rules governing international tax reporting.Ensure Compliant Reporting of Foreign Business Transactions
The most common reporting forms for foreign assets are Form 8938 and the FBAR. Form 8938, the Statement of Specified Foreign Financial Assets, covers reporting of foreign financial assets, provided the total value of those assets exceed certain thresholds. The FBAR, or Report of Foreign Bank and Financial Accounts, applies generally to all U.S. persons with a financial interest in, or signature authority over, foreign accounts that exceed more than $10,000 in aggregate at any time during the tax year.
In addition to the FBAR and Form 8938, however, substantial reporting requirements exist in relation to international transactions and business. U.S. persons who own an interest in foreign corporations may be required to file the complicated Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The form requires owners to disclose their ownership share of a foreign corporation at the end of the year and provide financial information of the entity such as the balance sheet and income statement. However, Form 5471 has complex attribution rules that could increase an owner’s share of the foreign corporation, and failure to apply these rules properly could lead to substantial penalties for non-compliance.
Business owners considering transferring their appreciated property to a foreign corporation with an eye toward utilizing the corporate “non-recognition” rules and potentially avoiding additional U.S. taxes should note that, although these transfers are feasible in some situations, the IRS imposes substantial limitations when the transfer involves a foreign corporation. Section 367 of the Internal Revenue Code spells out these limitations. In many cases, these transfers involve filing Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation and substantial other filing requirements which require the assistance of an advisor with significant international tax experience.Passive Activity Reporting
If a foreign entity derives a sufficient percentage of its assets or income from passive activities, it may qualify as a Passive Foreign Investment Company, and a U.S. person with an interest in the company, direct or indirect, may be required file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company.
Furthermore, U.S. persons may be obligated to report their holdings and income in foreign partnerships using Form 1065 and/or Form 8865. Form 1120-F applies to foreign corporations having income that is “effectively connected” with a U.S. trade or business, which typically means any foreign corporation with an employee, office, warehouse, or production facility in the U.S. Taxpayers may benefit by applying income tax treaties to reduce double taxation between two countries and mitigate US tax consequences.
An integral part of our practice involves advising both U.S. persons regarding their reporting requirements related to foreign assets, as well as assisting foreigners doing business in the U.S. Many of the reporting requirements are extremely complicated, and the assistance of an experienced professional can prove invaluable. If you have questions about your foreign assets, or desire legal assistance with regard to coming into tax compliance, contact the Los Angeles tax attorneys at the Ben-Cohen Law Firm.