U.S. taxpayers, whether a resident for tax purposes, a permanent resident or a citizen, are required by law to report all gross income from foreign sources on their U.S. tax return. It doesn’t make any difference where you live or whether you have to file a tax return in another country. The IRS considers worldwide income in calculating taxable income and income tax liability. There are treaty benefits and tax laws that may be used on your U.S. tax return to reduce or offset your U.S. income tax or to reduce your U.S. taxable income.
FinCEN 114, commonly called the FBAR
You are also required, if you cross a certain threshold of an aggregate balance in your foreign financial accounts, to file an annual disclosure report with FinCEN (the harmless sounding acronym for Financial Crimes Enforcement Network). The report is called the FinCEN 114, commonly known as an FBAR. The disclosure must be electronically filed using the FinCEN filing system. I does not accompany a tax return. The due date is June 30 of the year following the year you are reporting. For example, the 2015 FinCEN 114 will be due on June 30, 2016.
The FinCEN instructions for filing the FinCEN 114 (https://www.fincen.gov/forms/files/FBAR%20Line%20Item%20Filing%20Instructions.pdf) explains the rules and regulations for who has to file, how it is filed, what has to be reported and when it is due.
Judy Coker, EA, CAA has been assisting taxpayers with FBAR and FinCEN 114 filings for several years using the Bank Secrecy Act Filing (BSAF) efile system. Please let us know if you need our help.
Form 8938, the FATCA Form
In addition to the FinCEN 114, you may also have a requirement to disclose certain foreign assets with your tax return using Form 8938. The rules and regulations for Form 8938 often reports the same accounts, but has additional information or supplemental forms depending upon the type of foreign assets you own.
The FATCA laws and global cooperation with the U. S. Department of the Treasury are rapidly developing. The Treasury Department is entering into agreements with foreign countries to share information about taxpayers holding financial assets in their respective countries. The information shared between countries varies from country to country. The Treasury Department has published a list of countries (http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx) with which it has agreements. You should follow the tax laws about reporting worldwide income and financial accounts even if your country is not listed.
The instructions for Form 8938 (https://www.irs.gov/pub/irs-pdf/i8938.pdf) has detailed information about who has to file the form, what type of financial accounts must be reported and more.
Foreign Currency Exchange
The way that foreign currency amounts are converted to US dollars is often confusing as Form 8939 and FinCEN 114 require that you use the US Treasury rate of exchange for the last day of the tax year. The rates are published on the Bureau of Fiscal Service website. (https://www.fiscal.treasury.gov/fsreports/rpt/treasRptRateExch/treasRptRateExch_home.htm)
The IRS doesn’t have any specifically prescribed exchange rate for income you receive from a foreign source. The same applies to deductions and valuation of assets for purposes of depreciation. However there are recommendations for what exchange source and the advisable timing. Here is an excerpt from the IRS website: ” The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently. When valuing currency of a foreign country that uses multiple exchange rates, use the rate that applies to your specific facts and circumstances. Use the exchange rate prevailing when you receive, pay, or accrue the item. If there is more than one exchange rate, use the one that most properly reflects your income.”
As you may guess, challenges can arise in tax return preparation due to the fluctuation in exchange rates.