Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

December 28, 2012

Various reasons including the fight against terrorism and failure to pay tax on foreign income are driving our lawmakers to require more stringent reporting of foreign investment activities.  This is important because there have been significant changes in the past two years with the addition of a new reporting form, and the penalties for noncompliance include extremely high monetary penalties or jail time.  Even cases of non-willful neglect or ignorance could lead to penalties of $10,000.

Generally this affects people who have opened bank or investment accounts in other countries (or are authorized signers on such accounts) or have an ownership interest in businesses in foreign countries.  It generally does not include direct holdings of real estate, personal property, or financial investments made through an account setup here in the U.S. with a U.S. institution that diversifies your money and invests internationally.  For instance, holding an international stock index fund through Vanguard would not trigger a requirement because Vanguard has reporting requirements here in the U.S. that would cover you.  This additional reporting generally covers the things for which the U.S. would not know about unless you told them.

There are two forms which I feel tax practitioners should touch base with their clients about every year.  One is the Foreign Bank and Financial Accounts Form TD F 90-22.1 (FBAR), and the other is the relatively new Statement of Specified Foreign Financial Assets Form 8938 which has only been around for about two years.  The FBAR is not a tax return filing document, but is due to the Treasury Department by June 30th of each year (watch out if you are on extension and do your taxes late in the year).  The new Form 8938 gets filed with your tax returns.

I suggest you think about any connections you have with money or assets in a foreign country and discuss them with your tax professional this coming year. The laws do get complicated and sometimes you may not think you have a reporting requirement when you actually do.  For instance, you would have a reporting requirement if you have a relative or friend in a foreign country that adds you on to their bank account as a signer, simply for the convenience that you could write a check on their behalf if needed, regardless of whether or not you actually do.

You may have a reporting requirement if a foreign relative or friend has named you as a beneficiary in his or her trust; or perhaps you have a pension or deferred compensation plan which you will someday receive for past service with a foreign company or country; or maybe you are an owner or a partner in a business that holds assets that qualify (indirect interest).  As you can see, it is not always straight-forward, but I hope you are now more alert to the issue, and that you can identify situations that may need further review.

Seeking qualified professional help continues to grow in importance as we continue to move in a direction towards increased complexity.

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.