Tax information reporting has become a complex task for institutions, businesses, and individuals. Nowhere has the burden been greater than on parties required to report on transnational transactions. A labyrinthine web of disclosure and withholding requirements has arisen over the years. These rules can affect U.S. persons (generally defined in Sec. 7701(a)(30) as domestic individuals, corporations, partnerships, estates and trusts) and non-U.S. persons (any individual or entity that is not a U.S. person). The introduction several years ago of the Foreign Account Tax Compliance Act (FATCA) added to what had already become a huge burden for entities involved in the international arena.
The problems that can be faced are well-illustrated by the Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund (discussed below). The IRS estimates that it will take 20 hours to complete this form. However, it can take multiples of those 20 hours to learn the convoluted rules necessary to complete the form.
The purpose of this article is to provide a guide that acts to alert the practitioner to when an information return may be necessary. Making the determination often requires a time-consuming examination of the instructions for the form involved.
One problem a practitioner is likely to face is that it may be uncertain whether it is necessary to file an information return in certain circumstances. For example, a foreign independent contractor who performs services in a foreign country for a U.S. person is not subject to tax withholding or income tax liability in the United States when paid by the U.S. person. However, a question may arise as to whether that foreign person must file a form with the U.S. person notifying that no withholding is required. Although it is not clear whether there should be a filing in that situation, the foreign person should be advised to file Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) (discussed below). In other words, all doubt should be resolved in favor of filing.
For purposes of this article, an information return is any return that requires special disclosure about a U.S. person with foreign-source income or investments and non-U.S. persons with U.S.-source income and investments. In some instances, an information return can be filed with the taxpayer's tax return. In other instances, it may have to be filed separately from the tax return. Failure to comply with the filing requirements for any information return can result in substantial penalties.
The methodology used to identify the necessary forms for transnational tax reporting involved culling over 2,000 files on the IRS website at irs.gov. However, no claim is made that the list below is definitive. Further useful information on some of the forms discussed in this article may be obtained from IRS Publications 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and 519, U.S. Tax Guide for Aliens, both on the IRS website.
Transnational tax information forms
FinCEN Form 105, Report of International Transportation of Currency or Monetary Instruments
FinCEN Form 105, which is available on the Financial Crimes Enforcement Network's (FinCEN's) website (fincen.gov), has instructions that state that it must be filed by:
(1) Each person who physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped currency or other monetary instruments [defined in the form's instructions] in an aggregate amount exceeding $10,000 at one time from the United States to any place outside the United States or into the United States from any place outside the United States, and
(2) Each person who receives in the United States currency or other monetary instruments in an aggregate amount exceeding $10,000 at one time which have been transported, mailed, or shipped to the person from any place outside the United States.
Exceptions to filing and when and where the form must be filed are also listed in the instructions. Generally, the form must be filed within 15 days after receipt of the currency or monetary instrument being reported. Civil and criminal penalties for failure to file a return, material misstatements or omissions on a return, or filing a false or fraudulent return can be as great as $500,000 and/or up to 10 years in prison. (1)
FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
A U.S. person who has a financial interest in or signature authority over at least one foreign financial account must file this form if the aggregate value of all these accounts exceeds $10,000 at any time during the calendar year. (2) These accounts include a bank account, a foreign financial account holding stock and securities, a foreign mutual fund, a foreign-issued life insurance or annuity contract with a cash-value, foreign grantor trusts for which the taxpayer is a grantor, and indirect interests in foreign financial accounts through an entity if beneficial ownership in the entity exceeds 50%.
FinCEN Form 114 must be filed by April 15 of the following year, but an automatic six-month extension that filers do not have to apply for is provided. The form must be filed electronically through FinCEN's Bank Secrecy Act E-Filing System.
The minimum penalty for failure to file is $12,459 unless reasonable cause can be shown. The penalty for willful failure to file is the greater of $124,588, or 50% of the balance in the account(s) that should have been reported. (3) A willful violation may also be subject to criminal penalties (4)
Form 673, Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Sec. 911
Sec. 911 allows U.S. citizens and residents to exclude a limited amount of foreign earned income if certain criteria are met and the taxpayer files a Form 2555, Foreign Earned Income (discussed below), with Form 1040, U.S. Individual Income Tax Return. Form 673 is filed with the U.S. employer to claim an exemption on withholding of income tax for income that qualifies for the exclusion.
Form 706-CE, Certificate of Payment of Foreign Death Tax
U.S. citizens and residents, as defined in the instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, are allowed to claim a credit against their U.S. estate tax liability for death taxes paid to foreign countries. (5) Form 706-CE must be filed before the IRS will allow a credit for foreign death taxes claimed on a Form 706. Form 706-CE is submitted to the foreign government, which will then certify the form and send it to the IRS at the address provided in the form's instructions.
Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation
Sec. 6038B(a) and its regulations require that certain transfers of property by a U.S. person be reported on Form 926. Though the term U.S. person is not defined in Sec. 6038B, it is defined in Sec. 7701(a)(30) as any U.S. individual resident or citizen, a domestic partnership, a domestic corporation, an estate other than a foreign estate, and a trust controlled by U.S. persons subject to U.S. legal jurisdiction. If the transfers are made by a domestic or foreign partnership, then the form is filed by the domestic partners, not the partnership.
The transfers are those made to foreign corporations in exchanges described in Secs. 332, 351, 354, 355, 356, 361, and 367. Certain transfers are exempt from the filing requirement.
Sec. 6038B(c) provides that a penalty of 10% of the property's fair market value (FMV) be imposed if the reporting requirements are not met. However, the penalty shall not exceed $100,000 unless the reporting failure was due to intentional disregard. Sec. 6662(j) provides that a 40% penalty may apply on any underpayment that results from an undisclosed foreign financial asset understatement.
Form 1040-C, U.S. Departing Alien Income Tax Return
Resident and nonresident aliens who plan to leave the United States must file a Form 1040-C or Form 2063, U.S. Departing Alien Income Tax Statement (discussed below), at an IRS office at least two weeks before departure in order to receive a certificate of compliance. (6) The certificate cannot be issued more than 30 days before departure. The return reports the departing alien's income and deductions; the alien pays the expected tax liability. However, the alien may also be required to file a final tax return on a Form 1040 or Form 1040NR, U.S. Nonresident Alien Income Tax Return. If further reporting is required after the alien leaves, a credit will be available for taxes paid with the Form 1040-C or Form 2063.
Note that the Form 1040-C instructions provide a number of exceptions for those who are not required to file. These exceptions include certain visa holders and others.
(3.) IRS, "Report of Foreign Bank and Financial Accounts (FBAR)" (rev. Sept. 25, 2017), available at tinyurl.com/hnd8r38. For more on FBAR penalties, see Kemm, "Developing a Strategy to Fight FBAR Penalties," 48 The Tax Adviser 340 (May 2017), tinyurl.com/ya3puwbo.
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
A withholding agent is required to withhold taxes on the U.S.-source income of a foreign person and report the withholding on Form 1042. A withholding agent may be a U.S. person or foreign individual, trust, estate, partnership, corporation, nominee, government agency, association, or tax-exempt organization. It may also be a foreign financial institution described in Regs. Sec. 1.1473-l(d)(2).
The withholding agent can be held personally liable for amounts that are not withheld from the foreign person's U.S.-source income and may be assessed penalties and interest.
Note that the instructions on when and from whom withholding is necessary are vast and complex and should be mastered by anyone...