Americans Living Abroad: Taxes, FBAR, FATCA & Form 3520

Americans Living Abroad: Taxes, FBAR, FATCA & Form 3520

Americans Living Abroad: Taxes, FBAR, FATCA & Form 3520

When a U.S. person lives overseas, they still maintain an ongoing requirement to file U.S. tax returns and report their foreign accounts, assets, and investments to the U.S. government each year, just as they did when they resided in the United States. Unless an American living abroad formally expatriates from the United States and terminates their U.S. citizenship or permanent resident status, they are (unfortunately) still liable for U.S. tax and reporting. While there are many different international information reporting forms that an American living abroad may need to file, let’s examine some of the most common requirements these taxpayers must meet to remain in U.S. tax and reporting compliance.

U.S. Taxes

Unlike most other countries across the globe, the United States follows a citizenship-based taxation model for individuals who are considered US persons for tax purposes. Typically, this will include U.S. citizens, lawful permanent residents, and foreign nationals who meet the substantial presence test. If a taxpayer is a US person and living abroad, then they are still required to file US taxes and report their foreign assets to the US government. Noting that some taxpayers may qualify to make a treaty election to be treated as a non-resident alien for U.S. tax purposes. In addition, the taxpayer may qualify for foreign tax credits (FTC) and the foreign earned income exclusion (FEIE), which may minimize or reduce any double taxation.

FBAR (FinCEN Form 114)

FBAR refers to foreign bank and financial account reporting. Taxpayers who are considered U.S. persons are required to file the FBAR to disclose their foreign accounts, assets, and investments to the US government, even if they live overseas. It is important to note that if the individual qualifies as a US taxpayer, they are still required to file the FBAR even if they are not required to file the tax return. If the taxpayer files a treaty election to be treated as a non-US person for tax purposes, then under the recent case of Aroeste, they may be able to avoid filing the FBAR — although currently the IRS still takes the position that the taxpayer is required to report the account even if they make a treaty election.

FATCA (IRS Form 8938)

FATCA is the Foreign Account Tax Compliance Act. It is a form that is included as part of the Form 1040 tax return, so if the taxpayer is filing a Form 1040, then they are also required to file IRS Form 8938 when they meet the threshold requirements for having to file FATCA. It is important to note that taxpayers living overseas have a higher threshold before they have to start filing Form 8938 than their U.S.-based counterparts.

Form 3520/3520-A

Form 3520 is used to report foreign gifts, inheritances, and trust distributions. If a taxpayer lives overseas as an American citizen but the majority of their family are non-U.S. persons, then in any year that they receive a gift or an inheritance, they should be cognizant of the threshold requirements so they can determine whether they have to file this form. If they happen to own a foreign trust, then they may be required to file Form 3520 and Form 3520-A. Taxpayers must file this form timely, because penalties can be severe, with the Form 3520 penalty typically equating to a 25% fine on the value of the gift or inheritance received (if the Form 3520 is filed more than five months late).

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.