Archive for the ‘Foreign Reporting’ Category

Back to Basics Part XXXIV – Form 8938 – Statement of Specified Foreign Financial Assets

Originally published in the Cedar Street Times

March 4, 2016

For those of you living in the US (not just US citizens) with foreign bank accounts, foreign securities accounts, ownership interests in foreign corporations, partnerships, or other foreign potentially income generating assets, you may have a reporting requirement on Form 8938 – Statement of Specified Foreign Financial Assets.  Failure to report on this form carries with it significant penalties, so you want to be sure you are in compliance if you have assets of this type.

You may have heard about the Report of Foreign Bank and Financial Accounts (FBAR) which is currently filed on a Form FinCen 114 with the US Treasury Department (a few years ago the form was called a TD F-90-22.1) each year.  That form received a lot of press a few years ago as some of the large banks overseas cooperated with the US government to release the names of account holders living in the US, and is also tied to some of the amnesty programs you may have read about.  This often conjures up images of mutli-millionaires hiding money overseas to avoid paying US taxes.  Although this may be a component of it, I can assure you that it touches “normal” people as well that just happened to have foreign accounts, perhaps from living in a foreign country years ago, and still have the account, or maybe just living in the US for a few years and on a US work visa.

If you are reading this article, and thinking, “I have never heard of this before,” you likely have a relatively easy solution for the FBAR that will not result in huge monetary fines. This often consists of filing amended tax returns for the past three open tax years to report any income generated on these accounts, and filing FBARs for the past six years.  But you must do this before the IRS discovers it – so do not bury your head in the sand.

Whereas the FBAR can attribute its roots in the Bank Secrecy Act passed by Congress in 1970 and is filed separately from your tax returns with the US Treasury Department, the Form 8938 has only been around since 2011, and is filed as a form with your tax returns.  The Form 8938 has different reporting requirements as well.  Whereas the FBAR is focused on foreign bank and securities accounts whose aggregate value of all accounts exceeds $10,000 at any point during the year, the Form 8938 is broader and includes more foreign income generating assets, and is only required if the aggregate value at year end is over $50,000 or if the maximum value at any point during the year is over $75,000 for single and married filing separate filers or $100,000 at year end/$150,000 maximum value if married filing jointly.

Since the US taxes people residing in the US on worldwide income, (and so does California), the IRS wanted a way to ensure that the income from foreign accounts was being properly included on the US tax returns.  The FBAR does not do this, so the 8938 was created.

Parts I and II of the Form 8938 are a summary of the various types of specified foreign financial assets that you are reporting.  Part III is a cross-reference to the forms and line numbers in the tax return where any income generated by these assets is included.  Part IV is a cross-reference to foreign assets whose detail is not reported on the 8938 itself, but on other form specifically designed for those types of assets.  Parts V and VI are the specific details of each account listed in parts I and II, and include things like account numbers, addresses, amounts, foreign currency conversions, etc.

You can easily download the instructions to the Form 8938 online if you would like to learn more about the reporting requirements.  Even if you do not have a Form 8938 or FBAR filing requirement, you are still required to report on your US tax returns any foreign income earned by the accounts.  With many countries there are also tax treaties in place to prevent double taxation.

Please keep in mind, there are complex issues involved with these reportings, and depending on the assets, you may require the assistance of an accountant or attorney.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

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Confidentiality, Privilege, and Taxes

Originally published in the Cedar Street Times

August 22, 2014

Pretty much anybody that watches crime shows on television knows about attorney-client privilege.  This is how murderers can admit the details of their crimes to their attorneys and the communication is protected from discovery by the courts.

But what about tax related communications with your accountant?  Unfortunately, there are not a lot of television shows featuring taxpayers admitting the gory details to their accountants on how they swindled the IRS.  That said, prime time dramas are probably not the best place to learn about the legal and accounting world anyway!

Misinformed people will sometimes think they can sit down with their CPA and contrive ways to scheme the IRS, or that they can openly discuss all the income they took in under the table and did not report.  Communications with a CPA are confidential due to professional standards, but they usually do not qualify for evidentiary confidentiality privilege in a court of law.  This means the CPA should not disclose the information to other parties without your permission, but if questioned in a court of law, the information would have to be disclosed.  The other problem a CPA would have knowing the skeletons in your closet, is that a CPA (or any preparer) cannot knowingly file a false return.

So you may think you should hire a tax attorney to prepare your returns in order to get privilege.  That actually won’t work either.  One of the main tenets of attorney-client privilege is that if you do not treat the information as confidential and you disclose it to a third-party other than your attorney and his or her associates, then you have lost your privilege.  Since tax returns are inherently a third-party communication for disclosure to the taxing authorities, it has been ruled that tax preparation services are not afforded attorney-client privilege.  In fact, there have been interesting cases where attorneys have lost their attorney-client privilege because they included estate tax preparation as part of their engagement with the client.

Tax advice, however, is a different story.  For engagements that strictly involve tax advice, and not tax preparation, attorney-client and accountant-client privilege is extended.  Accountant-client privilege has more limitations than attorney-client privilege as defined in Internal Revenue Code section 7525.  Most notably is that accountant-client privilege does not extend to criminal matters before the IRS or Federal courts, nor does it apply to tax shelters designed for tax evasion.

As previously discussed, the disclosure of information to a third-party generally waives the attorney-client privilege.  An exception to this rule is if the attorney needs the assistance of another professional (such as an accountant) in order to render legal advice to the client.  A Kovel letter (based on the 1961 case) can be drafted and signed by the accountant and attorney which essentially extends the attorney-client privilege to the accountant.  The accountant is then, in essence, working for the attorney and not the ultimate client.  This does provide additional protections, but it still would not provide protections for tax return preparation.

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Are You Sure You Have No Foreign Reporting Requirements?

Originally published in the Cedar Street Times

May 31, 2013

My grandfather’s sister once had the opportunity to go toe-to-toe with the 1920s gangster, Al Capone…or so goes the family story.  She had ordered a fancy car and Capone sent a couple of his henchmen to convince her that she should allow him to purchase it since he did not want to wait for another one to be built.   She politely refused, at which point, they said Mr. Capone would like to talk with her in person.  So she drove to his place in Palm Island, Florida to meet the notorious gangster.  She was a rather outspoken individual, and managed to come out with her car, and did not even have to dodge bullets on the way past the front gate!  Most people know the interesting story about Al Capone is that the Feds could never get him for bootlegging, racketeering, prostitution, or murder, but they nailed him for tax evasion and failure to file tax returns!

Fast-forward the better part of a century and we are battling terrorism.  Sometimes it is difficult to prove that a particular individual was involved in an act of terrorism, but there may be other ways to get them.  How about the failure to report foreign accounts or even having signature authority over foreign accounts while residing in the United States?

Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts is required to be filled out each year for anyone that has bank or financial accounts (or is an eligible signer on someone else’s foreign accounts) that were established in a foreign country that aggregate $10,000 or more.  The form is due to the Treasury Department each year by June 30th (one month away).  Note this form does not go with your tax returns to the IRS.  The IRS has its own two-year old Form 8938 Statement of Specified Foreign Financial Assets which is more geared towards tax evasion and is filed with your returns.  It covers some additional assets and has different reporting thresholds, so you and your tax professional should review that as well.

The penalties for failure to file Form TD F 90-22.1 can be pretty sickening.  Willful neglect to file the form is punishable with civil and/or criminal penalties.  Civil penalties could be the greater of $100,000 or half of the account value.  Criminal penalties could be $250,000 plus five years in prison, or $500,000 and 10 years in prison if you are also violating another law simultaneously.  Even non-willful neglect (a.k.a. – your ignorance) carries a penalty of up to $10,000.  These are also applicable per year you fail to report!

The IRS was recently seeking six years in prison for a 79 year-old widow in Palm Beach, FL for such issues and related failure to report the income from foreign accounts.  I think the key is to just make sure you file the forms as needed, and have a discussion with your tax professional or an attorney if you are unclear if your assets qualify you to file these forms.

Oh, and if you happen to know any terrorists that need to file, please don’t forward my contact information…

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.