Foreign Owned Property and Financial Accounts
The 2016 tax deadline quickly approaching and I thought it would be appropriate to discuss a couple of lesser known tax traps that clients have been caught in by the IRS. They involve foreign owned bank accounts and foreign owned property. Even though you may not have not opened the account or purchased the property personally, you must disclose it on your taxes to avoid huge penalties from the IRS. Given that we are a country of immigrants, this most often occurs when a relative leaves you money or property abroad in the form of an inheritance. No matter how big or small, any instance of ownership requires disclosure to the IRS to be safe. The two forms below are for your reference:
• Report of Foreign Bank and Financial Accounts (FBAR)
• Form 8938 – Statement of Specified Foreign Financial Assets (Property)
Penalties for non-disclosure typically start at $10,000 per year per incident. This means that any oversites in the past need to be corrected with an amended tax return to include any missing forms to be in compliance.
Some try to avoid direct ownership of property outside the US by establishing a corporation in the country in which that the property is located so that the corporation owns the property and not the US citizen. But here is the catch. If you purchased the real estate and placed the title and ownership inside a corporation (i.e. foreign corporation) then you typically will have a CFC – a controlled foreign corporation. This would then require you complete a Form 5471 and include it in your tax filing. The penalties for failure to do so begin at $10,000 for each year you did not file the form.
In short, there are a number of advantages of ownership of asset outside of the United States. However you should do it with full disclosure to the IRS to avoid hefty penalties. If you find yourself in this situation you should immediately consult your tax professional.