International Information Disclosure Obligations – Part 1: Required Forms

Overview of Disclosure Requirements

This two-part article summarizes FinCen and IRS reporting requirements of U.S. citizens, resident aliens, certain non-resident aliens (e.g., who meet the “substantial presence test”), domestic entities, domestic trusts and domestic estates that have an interest in foreign financial accounts, brokerage accounts, retirement plans, foreign business entities (including sole proprietorships), and similar foreign assets. We will later publish another set of articles that covers various options to remedy the failure to file the required forms.

What to Expect in Part 1

In this Part 1, we will briefly cover international disclosure forms that must be submitted by certain U.S. taxpayers when certain conditions and thresholds are met. In Part 2, we will get into more detail regarding these forms and cover some traps regarding these forms.

Failure to file. Failure to file the applicable forms can lead to very harsh consequences that can potentially exceed the value of the unreported foreign item. In some cases, the taxpayer may even face criminal charges.

Immigrants beware. Immigrants are particularly vulnerable to inadvertently violating the reporting requirements, because they often retain bank accounts, retirement accounts, rental properties and other assets in their home country.

Who must report?

Most of the forms described in this article must be reported by specified individuals and specified domestic entities that have an interest in specified foreign financial assets and meet the applicable reporting threshold. Most often, this includes U.S citizens, resident aliens, and certain non-resident aliens, and certain domestic corporations, partnerships, and trusts.

Income Tax Return; Form 1040.

Form 1040 is the U.S. individual income tax return that must be filed by U.S. citizens and “Resident Aliens” if their world-wide income is over the filing requirement. They must report and pay taxes on their world-wide income. If they are already taxed in a foreign country, they can avoid double taxation through various options: foreign earned income exclusion, foreign tax credits, foreign tax deductions, treaty benefits, etc. A detailed discussion on these options is beyond the scope of this article.

“Resident Aliens” includes permanent residents/green card holders, but it also includes any alien that meets the “substantial presence test”. Whether such alien is in the U.S. legally or illegally is not relevant. The “substantial presence test” that triggers the alien’s duty to file a Form 1040 returns is the following:

An individual is physically present in the United States (U.S.) on at least:

1. 31 days during the current year, and

2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

Example:

Jose Rodriguez was physically present in the U.S. on 120 days in each of the years 2021, 2022 and 2023. To determine if he meets the substantial presence test for 2023, count the full 120 days of presence in 2023, 40 days in 2022 (1/3 of 120), and 20 days in 2021 (1/6 of 120). Since the total for the 3-year period is 180 days, he is not considered a resident under the substantial presence test for 2023.

Expatriation Rules

It is important to note that, for U.S. Citizens and green card holders, merely moving to another country temporarily or even permanently, will not avoid the requirement to file the applicable forms discussed herein, unless the they first complete the expatriation process.

International Information Forms. Reporting obligations are triggered when any of the following occurs:

Key International Information Forms

FBAR/FinCEN Form 114

Must be filed by U.S person that has foreign bank accounts that collectively exceed $10,000 in a tax year. For purposes of FBAR/FinCEN Form 114, a “U.S. person” (defined in 31 C.F.R. §1010.350(b) of the Bank Secrecy Act regulations) includes U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold

FATCA/Form 8938.

Must be filed by U.S. Taxpayers with a total value of specified foreign financial assets (including foreign bank accounts or other financial account, stocks or securities issued by a foreign entity, interest in a foreign entity, financial instrument or contract issued by a foreign entity, etc.) that exceed the applicable threshold:

a. Thresholds for applicable individuals living in the U.S.:

b. Thresholds for applicable individuals living abroad:

c. Thresholds for specified domestic entities: more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

The “U.S. taxpayer” language in FATCA is deliberately narrower than “U.S. person” for purposes of the forms described below and is meant to capture individuals (and certain entities) who could hide foreign financial accounts, while carving out those already heavily regulated or transparent (e.g., SEC-reporting corporations, government entities).

Form 5471

Must be filed by certain U.S. persons who are officers, directors, or shareholders of a foreign corporation, including (but not limited to) U.S. taxpayers who own 10% or more of the stock. (Ownership percentage and category of filer matter.)

For purposes of Form 5471 and the other forms described below, “U.S. persons” is defined in IRC §7701(a)(30) to include:

Form 8865

Must be filed by U.S. persons with an interest in a foreign partnership. This includes U.S. persons who:

own a 10% or greater interest, or

contribute property to the partnership in certain circumstances, or

control the partnership.

Form 926

Must be filed by a U.S. person who transfers property (including money or other assets) to a foreign corporation, if certain thresholds are met (generally, if the transfer is more than $100,000 or results in at least 10% ownership).

Form 8858

Must be filed by U.S. persons who are tax owners of a foreign disregarded entity (FDE) or who must file Form 5471/8865 and the foreign entity owns an FDE. (It’s not for a “foreign sole proprietorship” per se, but rather for a disregarded entity.)

Form 3520

Must be filed by a U.S. person who:

receives foreign gifts or bequests over certain thresholds (generally $100,000 from a nonresident individual or foreign estate, or more than ~$18,000 from a foreign corporation/partnership in 2025), or

engages in certain transactions with a foreign trust, or

Form 3520-A

Must be filed annually by the foreign trust itself (or by the U.S. owner as a substitute filing) if there is a U.S. owner under the grantor trust rules.

Form 8861

Must be filed by a U.S. person who is a direct or indirect shareholder of a Passive Foreign Investment Company (PFIC) (e.g., foreign mutual funds, certain foreign ETFs, some foreign corporations).

Stay tuned for Part 2 where we will dive deeper into these forms and applicable penalties for failure to file the required forms.

Need Guidance on International Tax Reporting?

Our team can help you understand your reporting obligations and ensure compliance. Contact us today to schedule a consultation.