Despite the surge in FATCA letters from Spanish banks in the past two years, there is a significant number of US taxpayers with Spanish bank accounts who still have not complied with their US tax obligations. In this essay, I would like to discuss the most common US tax reporting requirements of individual US owners of Spanish bank accounts.
Spanish Bank Accounts: the Key Importance of US Tax Residency
Virtually all US tax requirements with respect to Spanish bank accounts apply only to US tax residents. Therefore, it is important to understand who is considered to be a “US tax resident”.
Generally, this term includes: US citizens, US Permanent Residents, a person who satisfied the Substantial Presence Test and a person who declared himself as a tax resident. There are certain exceptions to this general rule, and your international tax lawyer will need to determine whether you are eligible for any of these exceptions or whether you can take a position under the relevant tax treaty to escape US tax residency.
It is important to point out the tax concept of US tax residency should not be confused with the immigration term “US permanent resident”. “US tax resident” has a much broader definition that encompasses US permanent residents, but also includes many other types of individuals. In my practice, I have noticed that this confusion is a frequent cause for mis-interpretation of US tax rules by immigrants who come to the United States on a visa, but who are not yet US Permanent Residents.
Now that we understand who is responsible for the disclosure of Spanish bank accounts to the IRS, we are ready to discuss the most common US tax reporting requirements that apply to these accounts.
Spanish Bank Accounts: Worldwide Income Reporting Requirement
All income earned by Spanish bank accounts must be reported on the US owner’s US tax return. The income must be reported in the United States irrespective of whether it was disclosed on Spanish tax returns, subject to Spanish tax withholding or never transferred to the United States.
The reason for such an invasive rule is the worldwide income reporting requirement that applies to all US tax residents irrespective of where they reside and where the income is earned. The worldwide income reporting requirement applies to all types of income, including bank interest income, dividends, capital gains, et cetera.
It should be pointed out that not all of the income earned in Spain would necessarily be treated similarly in the United States for income tax purposes. For example, income generated by mutual funds will be treated as PFIC income in the United States. You need to consult an international tax lawyer to determine the proper treatment of your Spanish income.
Spanish Bank Accounts: FBAR
FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, popularly known as “FBAR” is one of the most important and dangerous reporting requirements that applies to Spanish bank accounts. It is difficult to overstate the importance of this form, because of the enormous threat that FBAR poses to US owners of Spanish bank accounts.
The danger of FBAR stems from two factors. First, with the low filing aggregate threshold of just $10,000, FBAR is a very common information return that must be filed by the vast majority of Spaniards who move to the United States and US citizens who live in Spain.
Second, the main danger of the form stems from FBAR’s draconian system of penalties, which may be assessed by the IRS even in a non-willful situation. In other words, the penalties may be assessed even if the taxpayer simply did not know about the existence of FBAR.
Spanish Bank Accounts: FATCA Form 8938
While a newcomer (by tax standards), FATCA Form 8938 quickly became the FBAR contender for the first place of most important tax requirements. Created by the Foreign Account Tax Compliance Act in 2011, Form 8938 requires US tax residents to report all of their Specified Foreign Financial Assets (“SFFA”) as long as the filing threshold is met.
The threshold is much higher than that of FBAR. Still, Form 8938 is triggered if a taxpayer resides in the United States and has only $50,000 ($100,000 for a married couple) or higher on his Spanish bank accounts at the end of the year or $75,000 ($150,000 for a married couple) or higher during any time during the year. For most middle-class Spaniards who come to the United States, it is not a problem to meet this threshold.
While Form 8938 penalties are not as high as those of FBAR, Form 8938 is still a very dangerous form and, in some aspects, a lot more dangerous than FBAR. First of all, Form 8938 has a much broader scope than FBAR. The definition of SFFA includes not only foreign bank and financial accounts, but all sorts of other financial instruments including bonds, ownership interests in foreign businesses and even a beneficiary interest in a foreign trust. In a sense, Form 8938 is a “catch-all” form that is likely to require the reporting of foreign financial assets that were not disclosed on any other tax forms.
Second, Form 8938 is filed with and forms part of a taxpayer’s US tax return. For this reason, Form 8938 penalties affect the income tax penalty calculations, the taxpayer’s Foreign Tax Credit claims as well as the IRS ability to open up tax returns that would otherwise be closed under the general three-year Statute of Limitations.
Finally, it should be mentioned that Form 8938 has its own penalty structure for failure to file the form and other violations of its requirements.
Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Spanish Bank Accounts
In this short essay, I just listed the main and the most common three US tax reporting requirements that may apply to Spanish bank accounts owned by US tax residents. There may be other requirements that may apply to these US taxpayers.
This is why you should contact Sherayzen Law Office for professional help with your US tax compliance. We will determine what types of US tax requirements apply to your particular facts, prepare the necessary annual compliance forms to make sure you meet these requirements and conduct an offshore voluntary disclosure with respect to any requirements that you may have violated in the past.