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Polish Bank Accounts | International Tax Lawyer & Attorney Chicago IL

A large number of Polish immigrants in the United States continue to maintain close ties to Poland, including the ownership of Polish bank accounts. The same is true for Polish citizens with “green cards” who reside outside of the United States during most of the year. Many of these new American tax residents do not realize that these accounts may be subject to numerous reporting requirements in the United States. In this article, I will discuss, in a general manner, the top three US tax reporting requirements that may apply to these Polish bank accounts.

Polish Bank Accounts: Definition of a “Filer”

There is one critical term that we need to understand in order to properly apply US tax reporting requirements to Polish bank accounts – the concept of “filer”. In this context, “filer” means a person who fits into the category of taxpayers who are required to file a certain form.

It is important to understand that the definition of a filer changes from one form to another. In other words, a person may be required to file one form but not the other even though it concerns the same foreign account.

Despite these differences in the definition of a filer, we can identify a certain common definition that underlies all of the requirements we will discuss in this article, even if this definition is modified for the purposes of a particular form. This common definition can be found in the concept of a “US tax resident”.

All of the following persons are considered to be US tax residents: US citizens, US permanent residents, persons who satisfy the Substantial Presence Test and persons who declare themselves as US tax residents. This general definition of US tax residents is subject to a number of important exceptions.

All of the US international tax reporting requirements adopt the concept of US tax residency as the basis for their definitions of a filer. Where there are differences from the definition of US tax residency, they are mostly limited to the application of the Substantial Presence Test and/or the first-year and last-year definitions of a US tax resident.

For example, Form 8938 identifies its filers as “Specified Persons” (a concept that is applied increasingly throughout US tax code after the 2017 tax reform) while FBAR defines its filers as “US Persons”. Yet, the differences between these two terms mostly arise with respect to persons who declared themselves as US tax residents or non-residents. A common example can be found with respect to treaty “tie-breaker” provisions, which foreign persons use to escape the effects of the Substantial Presence Test for US tax residency purposes.

The determination of your US tax reporting requirements is the primary task of your international tax attorney. It is simply too dangerous for a common taxpayer or even an accountant to attempt to dabble in US international tax law.

Polish Bank Accounts: Worldwide Income Reporting

Now that we understand the concept of US tax residency and the fact that the definition of a filer may differ between different tax forms, we are ready to explore the aforementioned three US reporting requirements with respect to Polish bank accounts.

The first and most fundamental requirement is worldwide income reporting. It is also the requirement that applies to US tax residents as they are defined above (i.e. we are dealing here with the classic definition of US tax residency in its purest form).

All US tax residents must disclose their worldwide income on their US tax returns. This means that they must report to the IRS their US-source and foreign-source income. The worldwide income reporting requirement applies to all types of foreign-source income: bank interest income, dividends, royalties, capital gains and any other income.

Worldwide income reporting requirement applies even if the foreign income is subject to Polish tax withholding or reported on a Polish tax return. It also does not matter whether the income was transferred to the United States or stayed in Poland; the Polish-source income of a US tax resident must still be disclosed on his US tax returns.

Polish Bank Accounts: FinCEN Form 114 – FBAR

The second requirement that I would like to discuss today is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”). Under the Bank Secrecy Act of 1970, the US government requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over Polish (and any other foreign country) bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. If these requirements are met, the disclosure requirement is satisfied by filing an FBAR.

It is important to understand all parts of the FBAR requirement are terms of arts that require further exploration and understanding. I encourage you to search our firm’s website, sherayzenlaw.com, for the definition of “US Persons” and the explanation of other parts of the FBAR requirement.

There is one part of the FBAR requirement, however, that I wish to explore here in more detail – the definition of “account”. The reason for this special treatment is the fact that the definition of an account for FBAR purposes is a primary source of confusion among US Persons with respect to what needs to be disclosed on FBAR.

The FBAR definition of an account is substantially broader than what this word generally means in our society. “Account” for FBAR purposes includes: checking accounts, savings accounts, fixed-deposit accounts, investments accounts, mutual funds, options/commodity futures accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset, there is a very high probability that the IRS will find that an account exists for FBAR purposes.

Despite the fact that FBAR compliance is neither easy nor straightforward, FBAR has a very severe penalty system. On the criminal side, FBAR noncompliance may lead to as many as ten years in jail (of course, these penalties come into effect in extreme situations). On the civil side, the most dreaded penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Even FBAR non-willful penalties can wreak a havoc in a person’s financial life.

Civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. In 2015, the IRS added another layer of limitations on the FBAR penalty imposition. One must remember, however, that these are voluntary IRS actions and may be disregarded by the IRS whenever circumstances warrant such an action.

Polish Bank Accounts: FATCA Form 8938

The third requirement that I wish to discuss today is a relative newcomer, FATCA Form 8938. This form requires “Specified Persons” to disclose all of their Specified Foreign Financial Assets (“SFFA”) as long as these Persons meet the applicable filing threshold. The filing threshold depends on a Specified Person’s tax return filing status and his physical residency.

The IRS defines SFFA very broadly to include an enormous variety of financial instruments, including foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera. In some ways, FBAR and Form 8938 require the reporting of the same assets, but these two forms are completely independent from each other. This means that a taxpayer may have to report same foreign assets on FBAR and Form 8938.

Specified Persons consist of two categories of filers: Specified Individuals and Specified Domestic Entities. You can find a detailed explanation of both categories by searching our website sherayzenlaw.com.

Finally, Form 8938 has its own penalty system which has far-reaching income tax consequences (including disallowance of foreign tax credit and imposition of 40% accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

One must also remember that, unlike FBAR, Form 8938 is filed with a federal tax return and forms part of the tax return. This means that a failure to file Form 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Polish Bank Accounts

If you have Polish bank accounts, you should contact Sherayzen Law Office for professional help with your US international tax compliance. We have helped hundreds of US taxpayers with their US international tax issues (including numerous taxpayers with Polish bank accounts), and We can help You!

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FFI FATCA Requirements: Introduction | FATCA Tax Lawyer & Attorney

Since July 1, 2014, the Foreign Account Tax Compliance Act (“FATCA”) has imposed a heavy compliance burden on Foreign Financial Institutions (“FFIs”). Many of these FFIs have struggled with developing a good understanding of their new FATCA requirements even to this day. In this brief essay, I want to provide a general overview of these FFI FATCA requirements so that readers can begin to develop an understanding of FATCA.

FFI FATCA Requirements: Background Information

FATCA was enacted into law in 2010. The most important idea behind the new law was to combat US tax noncompliance of US taxpayers with foreign financial assets.

There are several important parts of FATCA, but the most important one of them was forcing FFIs to identify US owners of foreign financial assets, collect certain information about them and share it with the IRS. Failure to do so meant facing a FATCA penalty in the form of a 30% withholding tax on the gross amount of all transactions with a noncompliant FFI. In essence, FATCA turned FFIs around the world into free IRS informants.

FFI FATCA Requirements: Three Categories

What precisely does FATCA require FFIs to do in order to be FATCA-compliant? If we look broadly at the FFI FATCA requirements, we can group all of these requirements into three broad categories. Each of these categories consists of a myriad of smaller but still fairly complex FATCA compliance requirements and requires a deep understanding of new FATCA terms.

The first and most important category of FATCA requirements is to collect the required due diligence information concerning all account holders, investors and payees. “Collecting” here means obtaining the required due diligence information and documentation. In other words, FATCA has to be part of an FFI’s “Know Your Client” (“KYC”) procedures.

Additionally, these new due diligence requirements apply not only to new customers, but also to pre-existing account holders. Pre-existing account holders are the account holders who already had accounts with an FFI as of the time FATCA was implemented (i.e. July 1, 2014) or sometimes a different date.

The second requirement is to report to the IRS three categories of persons: (a) all US account holders; (b) recalcitrant account holders; and © non-participating (i.e. FATCA-noncompliant) FFIs. This means that, under FATCA, FFIs must turn over to the IRS the identifying information concerning accounts held by US persons as well as point out the “bad apples” who refuse to comply with FATCA.

Recalcitrant account holders is a fairly complex FATCA term. In its most basic form, it refers to an account holder who does not supply the required FATCA information and who does not fall under any types of a waiver. In a future article, I will provide a more detailed description of this term, but, at this point, I would like to refer the readers to Treas Reg § 1.1471-5(g)(2).

Finally, the FFIs are charged with the requirement to coordinate FATCA withholding as necessary. In other words, the FFIs are required to impose FATCA noncompliance penalties on any FATCA non-compliant FFI, thereby turning FATCA in a worldwide self-enforcing system from which no FFI can escape.

FFI FATCA Requirements Are Interconnected

Needless to say that all three of these FFI FATCA requirements are deeply related to each other. For example, the due diligence requirement is essential to an FFI’s ability to properly comply with its FATCA reporting and withholding obligations. It is important to keep this connection between different FFI FATCA Requirements in mind while building an effective FATCA compliance system.

Contact Sherayzen Law Office to Find Out More About Your FFI FATCA Requirements

Sherayzen Law Office is a US international tax law firm that specializes in US international tax compliance, including FATCA compliance. We also help FFIs develop an effective FATCA compliance program as well as analyze existing FATCA compliance programs.

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Specified Domestic Entity: Closely-Held Test | 8938 Lawyer & Attorney

In a previous article, I introduced the key term of the Specified Domestic Entity (“SDE”) Definition for corporations and partnerships that may be required to file FATCA Form 8938: “formed or availed of”. At that point, I stated that this term required that a business entity satisfies two legal tests. One of these tests is a Closely-Held Test.

Closely-Held Test: Background Information

Starting tax year 2016, certain business entities and trusts that are classified as SDEs may be required to file Form 8938 with their US tax returns. Treas. Reg. §1.6038D-6(a) states that “a specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in IRC Section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.”

In a previous article, I discussed the fact that “formed or availed of” is a term of art which has no relationship to the actual finding of intent. Rather, in the context of corporations and partnerships, the “formed or availed of” requirement is satisfied if two legal tests are met. One of these tests is a Closely-Held Test, which is the subject of this article.

Closely-Held Test: General Requirements

In order to meet the closely-held test, a corporation or partnership must be closely held by a specified individual. There are two separate parts of this test that need to be analyzed: (a) who is considered to be a specified individual, and (b) what percentage of ownership meets the “closely held” requirement.

Closely-Held Test: Specified Individual

In another article, I already defined the concept of a Specified Individual. It is, however, worth re-stating the definition here again for convenience purposes. Treas. Reg. §1.6038D-1(a)(2) defines Specified individual as anyone who is: (I) US citizen; (ii) resident alien of the United States for any portion of the taxable year; (iii) nonresident alien for whom an election under 26 U.S.C. §6013(g) or (h) is in effect; or (iv) nonresident alien who is a bona fide resident of Puerto Rico or a section 931 possession.

Closely-Held Test: Ownership Percentage for Corporations and Partnerships

The ownership requirement of the Closely-Held Test is explained in Treas. Reg. §1.6038D-6(b)(2) with respect to both, corporations and partnerships. A domestic corporation is considered to be “closely held” if “at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote, or at least 80 percent of the total value of the stock of the corporation, is owned, directly, indirectly, or constructively, by a specified individual on the last day of the corporation’s taxable year.” Treas. Reg. §1.6038D-6(b)(2)(I).

A domestic partnership is “closely held” if “at least 80 percent of the capital or profits interest in the partnership is held, directly, indirectly, or constructively, by a specified individual on the last day of the partnership’s taxable year.” Treas. Reg. §1.6038D-6(b)(2)(ii).

It is important to emphasize that the 80% threshold is met not only through direct ownership, but also through indirect and constructive ownership. So, one must closely look at the attribution rules of 26 U.S.C. §267 to determine whether the Closely-Held Test is met. Moreover, the constructive ownership rules for the purposes of the Closely-Held Test also contain an additional provision for the addition of spouses of individual family members.

Contact Sherayzen Law Office for Experienced Help with US International Tax Compliance Requirements for Corporations and Partnerships

If you are a minority or a majority owner of a corporation or partnership that either operates outside of the United States or has foreign assets, contact Sherayzen Law Office for professional help with US international tax compliance requirements. Our firm specializes in the are of US international tax law. We can Help You!

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Specified Foreign Financial Assets | Form 8938 International Tax Lawyers

Specified Foreign Financial Assets is one of the most important terms in contemporary US international tax law. In this article, I will explore what these Specified Foreign Financial Assets are and why they play such an important role in modern US international tax compliance.

Specified Foreign Financial Assets and FATCA

In order to understand the significance of the Specified Foreign Financial Assets, we must turn to one of the most important US tax laws called Foreign Account Tax Compliance Act or FATCA.

FATCA was signed into law in 2010 and it immediately became the most important development in international taxation since at least 1970s, if not all the way to the end of the Second World War. There are three parts of FATCA that made it such a revolutionary development in international tax law. The first part of FATCA requires all foreign financial institutions (FFIs) to report to the IRS, directly or indirectly, Specified Foreign Financial Assets (be careful, this concept can be modified by a FATCA implementation treaty to include and exclude various foreign assets) owned by US persons. In essence, it meant that the world financial community would now serve as an IRS informer, providing the third-party reporting of financial assets owned by US persons.

In order to enforce this “obligation”, the second part of FATCA imposed a 30% penalty on the gross amount of a transaction whenever the transaction is related to an institution that is not compliant with FATCA. Such a huge penalty was meant to force all FFIs to become FATCA-compliant and, to a large extent, this goal has been attained.

With the third-party reporting secured by the first two parts of FATCA, the third part of FATCA imposed a new reporting requirement, Form 8938, on certain categories of US taxpayers who would fall within the categories of Specified Individuals and (starting 2016) Specified Domestic Entities. FATCA Form 8938 forced these Specified Persons to directly report their Specified Foreign Financial Assets with their US tax returns.

Specified Foreign Financial Assets: General Definition

In general, Specified Foreign Financial Assets include: foreign financial accounts and assets that are held for investment and not held in an account maintained by a financial institution. The concept of “assets held for investment and not held in an account” covers stocks or securities issued by anyone who is not a US person, any interest in a foreign entity, any financial instrument or contract that has an issuer or counterparty that is other than a US person, stock issued by a foreign corporation, an interest in a foreign trust or foreign estate and a capital or profits interest in a foreign partnership.

In other words, definition of the Specified Foreign Financial Assets is so broad that it applies to virtually any financial instrument or security one can imagine as long as one of the counterparties and/or issuers is a foreign person. It also includes pretty much any ownership interest in a foreign business entity as well as a beneficiary interest in a foreign trust. Therefore, it is always prudent to contact an international tax attorney to confirm whether your particular investment is covered by the definition of the Specified Foreign Financial Assets.

Specified Foreign Financial Assets: Additional Non-Exclusive Lists of Assets

Additionally, the instructions to Form 8938 specifically state that Specified Foreign Financial Assets encompass an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty. Specified Foreign Financial Assets also include a note, bond, debenture, or other form of indebtedness issued by a foreign person. Finally, options and other derivative instructions with a foreign counterparty or issuer are also included in the definition of Specified Foreign Financial Assets.

Specified Foreign Financial Assets: Influence of FATCA Implementation Treaties

Despite the broad general definition of Specified Foreign Financial Assets and despite the “laundry” list of assets specifically identified above, one should always look at a specific FATCA implementation treaty in order to verify whether an asset is considered to fall within the definition of Specified Foreign Financial Assets. In particular, one must have extra care with foreign retirement accounts. During the negotiation of FATCA Implementation Treaties, countries often insisted that particular types of retirement accounts should be excluded from FATCA reporting (the United Kingdom was particularly successful in this respect).

A word of caution: even if an asset is excluded from FATCA reporting, it does not automatically mean that it would also be excluded from FBAR reporting. It is possible to have a financial asset reportable exclusively on FBAR, but not Form 8938.

Contact Sherayzen Law Office for Professional Help with Reporting of Specified Foreign Financial Assets on Form 8938

If you have any of the Specified Foreign Financial Assets listed above, contact Sherayzen Law Office for professional help. In addition to annual tax compliance, our firm can help you with the offshore voluntary disclosure with respect to any delinquent Forms 8938 which you have not timely filed in any of the prior years.

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