Despite the domination of international tax compliance by FATCA since at least July of 2014, many US owners of Lebanese bank accounts are still not compliant with their US tax obligations. In fact, for many of them, the receipt of a FATCA letter is a huge surprise. In this essay, I would like to discuss the US tax compliance requirements of individual owners of Lebanese bank accounts. I will focus only on the main and most common requirements; other requirements may apply to your foreign bank accounts.
Lebanese Bank Accounts: Who Needs to Report Them
In general, it is important to understand that your Lebanese bank accounts are most likely subject to one or more US tax reporting requirements if you are a US tax resident.
“US tax resident” should not be confused with the immigration term of “US permanent resident”. Rather, the term “US tax resident” includes: US citizens, US permanent residents, any person who satisfied the Substantial Presence Test and any person who declared himself as a tax resident (there are several types of situations that fall within this category; the most common one is when a non-resident alien files a joint tax return with his or her US spouse). For example, if you are here on an B-1/B-2 visa, L-1 visa, H-1B visa or E-1/E-2 visa and you satisfied the Substantial Presence Test, you are likely a US tax resident.
This is obviously a very general description of US tax residency. There are important exemptions for certain types of visas, especially students and scholars. Moreover, in certain situations, a person who satisfied the Substantial Presence Test may adopt a treaty position that he was still not a tax resident of the United States. Then, we enter a world of complications with respect to which of the US tax reporting requirements would still apply to such a person.
It must be remembered that the final determination of whether a taxpayer should adopt a position that he is a US tax resident should be made by an international tax attorney based on the facts of a particular case.
Lebanese Bank Accounts & Worldwide Income Reporting Requirement
The first and very important requirement that applies to Lebanese bank accounts owned by a US tax resident is worldwide income reporting. A US tax resident must disclose on his US tax return and pay US taxes on his worldwide income.
This means that any income generated by his Lebanese bank accounts should disclosed on his Form 1040, including any bank interest income paid, dividends, royalties and capital gains. This income must be disclosed even if it is subject to tax withholding by the Lebanese government.
Lebanese Bank Accounts & PFICs
In this context of the worldwide income reporting requirement, it is important emphasize that it is possible that some of the income generated by investment accounts in Lebanon may not be treated as ordinary income or capital gains. Rather, such income may be classified as PFIC income leading to the requirement to file Form 8621 and pay PFIC taxes and PFIC interest in the United States.
Lebanese Bank Accounts & FBAR
One of the most important requirements that may apply to your Lebanese bank accounts is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as “FBAR”. Due to its very low filing threshold, the FBAR is a common and very dangerous US international information return. What makes FBAR so dangerous are the draconian penalties that may be imposed for failure to comply with FBAR requirements – penalties that may be assessed by the IRS even in a non-willful situation. This form should definitely be number one on your US tax compliance list.
Lebanese Bank Accounts & FATCA
FATCA Form 8938 is another highly important requirement. Born in tax year 2011 out of the Foreign Account Tax Compliance Act, Form 8938 requires US tax residents to report their Specified Foreign Financial Assets (“SFFA”).
While SFFA mostly duplicates the FBAR filing requirement with respect to foreign bank and financial accounts, there are important differences. Generally, SFFA requires you to report a much broader range of foreign assets than just foreign bank and financial accounts, including ownership interests in foreign business assets and a beneficiary interest in a foreign trust. In fact, Form 8938 plays a highly important role of being a “catch-all” form – i.e. it is likely to be applicable whenever a foreign asset is not reported elsewhere.
Unlike FBAR, Form 8938 is attached to the tax return. This has tremendous implications for the Statute of Limitations of the tax returns that are filed (or should have been filed) with Form 8938. In other words, failure to file Form 8938 may allow the IRS to open up tax returns even when the general three-year Statue of Limitations has passed.
Form 8938 has its own well-developed system of penalties, including a $10,000 failure-to-file penalty. Form 8938 penalties also have important implications for the ability of a taxpayer to claim Foreign Tax Credit on Form 1116.
Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Lebanese Bank Accounts
There may be other reporting requirements that may apply to your Lebanese bank accounts; I just listed in this essay the main and the most common ones. Given this tremendous complexity of US tax reporting requirements, it is imperative that you consult an international tax lawyer with respect to your ownership of Lebanese bank accounts.
The international tax law firm of Sherayzen Law Office can help You! Our firm is a leader in US tax compliance and has successfully helped hundreds of US taxpayers to bring their tax affairs into full compliance with US tax laws, including numerous clients with Lebanese bank accounts.