Unreported Foreign Income or Bank Accounts?

Received a threatening letter from a foreign bank threatening to report you to IRS?
Read on the Web that you are going to prison for failing to file and report your foreign income and bank accounts?
Own property overseas or received a large foreign gift or inheritance in recent years?

Don’t panic, you’ve come to the right place. A substantial portion of my tax practice involves U.S. taxpayers just like you and there is a lot of false information on the Web to alarm and traumatize you.

Please Note: This is a highly specialized area of tax law and there are many so-called tax practitioners who use scare tactics, but are largely clueless as to how this area of tax law actually works.

In contrast, since 2003, I’ve represented hundreds of clients in similar situations. I’ve battled IRS for 35+ years. I understand how they think and will react to your situation if they find out about you. Don’t worry, I can fix your problem and keep you out of jail.

If one or more of these apply to you, contact me immediately:

  • Ownership of or signature authority over, one or more foreign bank or financial accounts1 worth $10,000 or more at any time during the year;
  • Foreign accounts, deferred compensation or ownership in foreign entities (stock, securities, family business ownership) exceeding $100,000 for joint filers ($50,000 for single filers) determined at the end of the year;
  • Receipt of foreign gifts or inheritances of $100,000 or more in total during any year in which you were a U.S. citizen or long-term resident, subsequent to 1995; or
  • Regardless of the value, ownership of 10% or more in a foreign corporation or partnership;
  • Unreported interest, dividend, rents or royalties or other earnings and profits from foreign accounts, investments, assets or real property;
  •  Beneficiary of a foreign trust or estate.

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Summary of the Law on Gifts From a Non-U.S. Taxpayer

A transfer of real property or tangible personal property by a nonresident alien is subject to gift tax only if it is situated in the U.S. Internal Revenue Code Section §2511(a); Regs. §25.2511-3(a).  Section 2511 (a) reads as follows:

…, the tax imposed by section 2501 shall apply … whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States. (emphasis added)

IRC Regulation 25.2511-3 reads as follows:

(a) In general.  Section… 2511 contain[s] rules relating to the taxation of transfers of property by gift by a donor who is a nonresident not a citizen of the United States. … these rules are:

(1) The gift tax applies only to the transfer of real property and tangible personal property situated in the U.S. at the time of the transfer if …—

(i) The gift was made on or after January 1, 1967, by a nonresident not a citizen of the United States…(emphasis added)

Thus, under IRC Sec. 2511(a), gift tax does not apply to transfers of intangible property by a nonresident alien. Examples of intangible property include stock, bonds, debt obligations, and bank deposits. For instance, the transfer of Treasury Bills not subject to gift tax, see PLR 8210055 which held as follows:

In general, section 2501 does not tax the transfer of intangible property by a person who is neither a citizen nor a resident of the United States.  Section 25.2511 – 3(b) of the Gift Tax Regulations defines the term “intangible property” as “a property right issued by or enforceable against a resident of the United States or a domestic corporation (public or private), irrespective of where the written evidence of the property is physically located at the time of the transfer.”

Debt obligations such as bank deposits or obligations of which the United States is the primary obligor are considered to be intangible property. See section 25.2511 – 3(b)(4) of the regulations. Accordingly, a transfer of ownership by B to A of these Treasury Bills will not be subject to a gift tax pursuant to section 2511 of the Code. The transfer by B to A of $20,000 by a check to be drawn on a foreign bank and payable by a United States bank will not be subject to a gift tax as such property is situated outside the United States.

Generally, tangible personal property is property the value of which is dependent upon the property’s physical form ( such as a block of gold or a diamond ring). Texas Instruments Inc. v. U.S., 551 F.2d 599 (5th Cir. 1977). See Regs. §25.2511-3(b). In determining whether property is tangible or intangible property, courts have defined “intangible property” as property the value of which is attributable to the property’s intangible elements rather than to the property’s tangible form. See Ronnen v. Comr., 90 T.C. 74 (1988).

Consequently, monetary gifts in the form of a check or wire transfer by a non-resident alien to a U.S. taxpayer are not subject to gift tax. The recipient of a foreign gift does not pay tax on the gift, but may have a reporting requirement (Form 3520) if the total value of all gifts or inheritances received exceed certain threshold amounts (generally $100,000 or more received from one or more individuals during a calendar year).

The concept of “domicile” controls whether an individual is a U.S. person or non-resident alien for gift and estate tax purposes. A non-resident alien (not domiciled in the U.S.) is subject to gifts taxes only on U.S. real property and tangible property located in the U.S.. However, the U.S. estate of a non-resident alien (the individual dies) is comprised of U.S. real property and both tangible and intangible properly located in the U.S. (this includes securities issued by a U.S. company).

A green card holder is usually considered to be domiciled in the U.S. as a permanent resident, but a student or an individual in the U.S. on a work visa is generally not considered to be domiciled here for gift and estate tax purposes, even though the individual may be a resident for U.S. income purposes.

The gift and estate tax exemption equates to only $60,000, so a non-resident alien who dies owning $1.0 million of stock in a U.S. company (or a U.S. residence), has a taxable estate of $940,000 ($1.0 million – $60,000 exemption = $940,000). Thus, many non-resident aliens purchase U.S.-based assets through a foreign corporation to avoid estate taxes.

Domicile is a complicated concept, but in general terms, means the place where one intends to live on a permanent basis. Thus, in general, a non-resident alien in the U.S. for a limited time (F-1, L-1, H1 B visas) would not be domiciled here, but an individual applying for green card would, because a green card means the person want to immigrate to the U.S. , i.e. he/she want to live here permanently.  A non-U.S. citizen who is domiciled in the U.S. is subject to gift and estate taxes on gift-type transfers of their world-wide assets, but they have a unified estate and gift tax exemption of $5,350,000 currently – the exemption is indexed for inflation.

In summary, a non-resident alien is not subject to gift taxes, except on tangible property located in the U.S. and U.S. real estate, but is subject to estate taxes on intangible property located in the U.S., including U.S. securities (subject to an exemption worth $60,000). A non-U.S. citizen domiciled in the U.S. is subject to both gift and estate taxes on their world-wide assets, but has a unified gift and estate exemption currently worth $5,350,000 in 2015 (the amount is indexed for inflation).

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U.S. Tax Laws Involving Foreign Income, Assets & Financial Accounts

  1. U.S. Taxpayers (generally residents or citizens) must report their world-wide income, credits and deductions on their U.S. tax returns (Form 1040) and, in general, are entitled to foreign tax credits for taxes income taxed to a foreign country.
  2. U.S. Taxpayers with an ownership interest or signature authority over foreign financial accounts (bank and brokerage accounts, on-line gaming accounts, corporate, escrow, trust and other entity accounts, certain retirement plans and life insurance with a cash value) are required to electronically file an annual Foreign Bank and Financial Account Reports (FBARS) on or before June 30th of the following year. There are no extensions. The maximum fine for the non-willful failure to timely file an FBAR is $10,000 and there is a six-year statute of limitations for assessment of the penalty. The penalty may be reduced or eliminated upon a showing of “reasonable cause.”
  3. In addition to the FBAR requirement, starting in 2011 U.S. taxpayers with foreign financial account and certain other financial assets (generally, stock or securities,  including certain employee stock benefit plans, partnership or LLC interests, precious metal certificates) must report those assets on Form 8938, which is filed with the Form 1040. The threshold filing requirements start at $50,000 for single taxpayers living in the U.S. and $100,000 for married couples.  These amounts are doubled if the couple lives overseas.  Note: Physically holding gold or silver bars or other precious metals (even if they are in storage) is not a financial account, but holding certificates representing an interest in precious metals is considered a financial account.
  4. U.S. Taxpayers who have a 10% or greater interest in a foreign corporation must file Form 5471 with the Form 1040. There are equivalent filing requirements for 10% or more ownership in a foreign partnership.  Interests in family investments, if held in an entity is subject to this reporting requirement, but total or partial ownership of real estate is not.
  5. U.S. Taxpayers who receive a foreign gift or inheritance from an individual of more than $100,000 during the calendar year must file Form 3520 to report the gift or inheritance. The due date of Form 3520 is the same as the Form 1040, and is extended if a valid extension is filed for the Form 1040. The threshold reporting requirement for a gift from an entity or trust is much lower.
  6. U.S. Taxpayers who earn wages or self-employment income while residing outside the U.S. may be entitled to a foreign earned income exclusion if they are considered residents of a foreign country or remain outside the U.S. for a period of 330 days during any 12-month period. The maximum income exclusion is $97,600 for 2013, $99,200 for 2014, $100,800 for 2015 and $101,300 for 2016. The exclusion, however, must be claimed on a timely filed U.S. tax return, it is not automatic. There is also a partial exclusion for housing costs, if they exceed a certain minimum.
  7. IRS has a couple of “amnesty” programs available for taxpayers with unreported foreign income for foreign financial accounts, as well as taxpayers who failed to properly report ownership in foreign entities or receipt of foreign gifts or inheritances of $100,000 or more in the calendar year.  Penalties are drastically reduced for taxpayers willing to sign a sworn statement, under federal laws of perjury, that they were not “willful” in their failure to comply with the tax law.
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