Reviewed by

Philip M. Falco, Attorney & CPA

U.S. taxpayers with foreign accounts, investments, businesses, trusts, gifts, inheritances, or previously unreported foreign income can face several overlapping federal reporting systems. The correct filing depends on what is owned, where it is located, the taxpayer’s relationship to the asset or entity, and whether the issue involves current compliance or a prior-year reporting failure.

Philip M. Falco is both an attorney and certified public accountant in Denver and assists taxpayers with international tax reporting, offshore compliance, delinquent foreign information returns, FBAR matters, voluntary disclosure, and related tax controversies.

International Tax and Offshore Compliance

International tax compliance frequently involves more than one form. A foreign bank account can implicate FBAR reporting and Form 8938. Ownership of a foreign corporation can require Form 5471 while also creating questions involving Form 8938, FBAR, PFICs, Subpart F income, or GILTI. Foreign trusts can involve Forms 3520 and 3520-A in addition to other foreign asset reporting.

The first step is therefore not simply identifying a form number. It is identifying the complete set of U.S. filing obligations and determining whether prior filings were complete.

Foreign Bank Accounts and FBAR Reporting

The FBAR, FinCEN Form 114, is a separate foreign financial account reporting system. It is not filed as part of the federal income tax return.

FBAR questions can arise from direct ownership of foreign accounts, certain entity interests, and signature or other authority over foreign financial accounts. When prior FBARs were missed, the appropriate correction procedure depends heavily on the surrounding facts and the taxpayer’s conduct.

Form 8938 and FATCA Reporting

Form 8938 is the federal income tax return reporting regime for specified foreign financial assets. Although Form 8938 and the FBAR can overlap, they are separate requirements with different filing rules, thresholds, and definitions.

A taxpayer may therefore need one form, both forms, or additional international information returns depending on the foreign assets involved.

Unreported Foreign Accounts, Assets, or Income

Discovering an omitted foreign account or information return does not automatically determine the correction procedure. The available approach depends on the type of omission, whether tax was understated, the taxpayer’s filing history, and whether the conduct was non-willful or potentially willful.

Streamlined Filing Compliance Procedures

The IRS Streamlined Filing Compliance Procedures are intended for qualifying taxpayers whose failures were non-willful.

The streamlined procedures include separate paths for qualifying U.S. residents and taxpayers living outside the United States:

Potentially Willful Conduct and Voluntary Disclosure

If there is concern that a reporting failure may have been willful, the analysis is materially different. Taxpayers should evaluate the IRS Criminal Investigation Voluntary Disclosure Practice before making corrective filings.

The distinction between willful and non-willful FBAR violations can affect penalties, disclosure strategy, and potential criminal-tax exposure.

Delinquent International Information Returns

Some taxpayers reported their income correctly but failed to file one or more required foreign information returns. Others discover that both information reporting and income-tax reporting were incomplete.

See Delinquent International Information Returns for issues involving late Forms 8938, 5471, 3520, 3520-A, 8621, 8865, 8858, and related filings.

Foreign Business Ownership and U.S. Tax Reporting

Ownership or operation of a business outside the United States can create specialized information-return obligations even when the foreign business is fully compliant under local law.

The U.S. reporting analysis begins with federal tax classification, direct and indirect ownership, constructive ownership, changes in ownership, related-party transactions, foreign accounts, and the income and assets held by the business.

See the Foreign Business Ownership and U.S. Tax Reporting hub for an overview of the principal reporting systems.

Form 5471 — Foreign Corporations

Form 5471 can apply to certain U.S. persons who own, control, acquire, dispose of, or otherwise have specified relationships with foreign corporations. The filing analysis can also interact with controlled foreign corporation rules, Subpart F income, GILTI, distributions, and previously taxed earnings.

Form 8865 — Foreign Partnerships

Form 8865 addresses certain interests and transactions involving foreign partnerships, including control, specified ownership interests, contributions, acquisitions, dispositions, and changes in proportional interests.

Form 8858 — Foreign Disregarded Entities and Branches

Form 8858 can apply to certain foreign disregarded entities and foreign branches. An entity that is disregarded for substantive federal income-tax purposes can still carry significant international information-reporting requirements.

PFICs and Form 8621

Foreign mutual funds, foreign investment companies, and other passive foreign investment holdings can create PFIC and Form 8621 filing issues.

PFIC taxation can differ substantially from ordinary U.S. investment taxation. Reporting can also become more complicated when PFIC interests are held through foreign corporations, partnerships, trusts, or other foreign structures.

Foreign Gifts, Inheritances, and Trusts

Receiving money or property from outside the United States does not necessarily mean the receipt itself is subject to U.S. income tax. It can nevertheless create significant information-reporting obligations.

Form 3520 can apply to certain foreign gifts, inheritances, and transactions with foreign trusts.

Where a foreign trust has a U.S. owner, Form 3520-A can create a separate annual reporting obligation. Foreign trust reporting should be analyzed carefully because several filing requirements and penalty provisions can overlap.

International Tax Penalties

International information-return penalties can arise independently of the amount of income tax owed. A taxpayer can therefore face a significant reporting penalty even when little or no additional tax is due.

The applicable rules vary by form and can involve fixed penalties, continuation penalties, percentage-based penalties, reasonable-cause defenses, and other procedural considerations.

See International Tax Penalties for an overview of penalty issues involving FBARs and foreign information returns.

Choosing the Correct Compliance Path

A corrective filing should be selected only after understanding the complete facts. The central questions generally include:

Which foreign accounts, assets, entities, trusts, gifts, or investments were involved?
Which income tax returns and international information returns were required?
Was all associated income reported?
How many years are affected?
Were the failures isolated or part of broader foreign reporting noncompliance?
Was the conduct non-willful, or are there facts that could indicate willfulness?
Has the IRS already contacted the taxpayer or begun an examination?

Those facts help determine whether the matter is principally current-year compliance, a delinquent information-return issue, a streamlined filing matter, a reasonable-cause case, or a potentially willful voluntary disclosure matter.

International Tax Attorney and CPA

International tax matters often require both legal and accounting analysis. The reporting obligation may depend on entity classification, ownership attribution, financial-account rules, income recognition, treaty considerations, prior filing history, and potential penalty exposure.

Philip M. Falco’s combined attorney and CPA background allows the filing, tax, and legal-risk issues to be evaluated together rather than as unrelated problems.

International Tax Resources

Unsure Which International Filing or Correction Procedure Applies?

International tax matters often involve overlapping filing requirements. A foreign account, foreign business, investment fund, trust, gift, inheritance, or previously omitted filing can trigger more than one reporting regime.

The appropriate response also depends on whether the issue involves a current filing, a delinquent information return, non-willful prior noncompliance, or potentially willful conduct.

If you need help identifying the filing obligations or evaluating how a prior international reporting problem should be addressed, schedule a Tax Attorney Consultation.