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It’s Extension Time! Checklist for Reporting Foreign Assets

Tax-checklistAs we come to an end of the filing season, keep in mind important foreign information reporting requirements that may affect your client’s income tax return.  On this year’s Form 1040, did you check “yes” that the client has a foreign bank account on Schedule B and list the location of the account? 

How about completing Form 8938 Statement of Specified Foreign Financial Assets?   The purpose of Form 8938 is to report an interest in specified foreign financial assets, which include, but are not limited to:  foreign bank accounts, brokerage accounts, interest in foreign entities and any “foreign financial instrument or contract that has an issuer or counterparty that is not a U.S. person.” Once your client meets certain reporting requirement thresholds, Form 8938 is required.

Here are some last-minute reminders to help you through the Oct. 15 tax deadline: 

  • Consider other foreign related forms and information that may be required. Remember if you filed your client’s FBAR, then you have the information necessary to complete Part I of Form 8938.   If you have reported foreign asset information on forms such as Form 5471, 8865, or 3520, be sure to indicate the number of these forms filed on Part IV of Form 8938.  
  • Remember to complete the summary of tax items related to foreign assets in Part III of Form 8938 and make sure it agrees with the income reported on the appropriate forms and schedules included in this year’s individual tax return. 

Besides the Form 8938, additional foreign information reporting forms may be required, such as:

Form 5471: Information Return of U.S. Persons with Respect To Certain Foreign Corporations.  This return is filed by U.S. taxpayers who hold an interest in a controlled foreign corporation.  To prepare, you’ll need incorporation documents, shareholder data, books and records, and information regarding transactions with related parties.  You should also:

  • Ask the client if he or she has a foreign contact or accountant to help, as obtaining complete and accurate information may be difficult.
  • Determine if company dividends to its U.S. shareholders qualify for the lower tax rate of 15%. They might, providing certain rules are met. 
  • Watch for any income considered Subpart F income.

Forms 3520/3520-A: Foreign Trust Transactions and Ownership.  These returns are filed by U.S. taxpayers to report certain foreign gifts or bequests, distributions from a trust, and ownership of a foreign trust. Be aware that foreign trusts can involve bank accounts among other things. On behalf of your clients, you’ll need to: 

  • Obtain and review the trust documents. 
  • Review the account activity from the foreign account statements and determine if FBAR filing was required.    
  • Allow time to obtain the necessary signatures as this form has several spots for signatures. 
  • File Form 1040NR if the foreign trust is treated as a grantor trust for U.S. tax purposes.
  • Confirm whether your client received a gift exceeding $100,000 from a foreign person.  If so, be aware that Form 3520 is required to report transactions with foreign trusts, as well as gifts received by a U.S. person from a foreign person.  In addition, the  foreign trust is required to report income, expense, distributions, and balance sheet information on Form 3520-A, which is due March 15 and can be extended to Sept. 15. 

Please note that the discussion above is not an all-inclusive checklist. Instead, it serves as a reminder of items to consider when preparing returns. Other commonly filed foreign information returns include Form 8865 (Certain Foreign Partnerships) and Form 926 (Transferor of Property to a Foreign Corporation).

For links to forms, notices and regulations that you need to comply with foreign asset reporting rules, visit the AICPA’s international tax webpage.

Gary L. Howard, CPA, Managing Principal, G.L. Howard, CPA.  Gary has been specializing in tax controversy and litigation support for civil and criminal matters since the founding of his firm in 1986.  He holds a M.S. in Taxation from Golden Gate University, San Francisco and a B.A. in Economics and Accounting from California State University, Fullerton. 

Tax checklist image via Shutterstock

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