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FBARs and Polish Lokata Accounts

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In recent years, I have received a number of questions from my Polish clients about whether “Lokata” accounts are reportable on the FBARs. The short answer is “Yes”.

Lokata Accounts

Lokata is a fixed-term deposit account which is very common in Polish banks; a Lokata is very similar to U.S. CD-type of accounts. There are many types of lokatas – overnight, three-month, six-month and even twelve-month lokatas. Usually, the bank would automatically take the funds from a current account (so-called “rachunek biezacy”) and deposit it on the lokata at a certain fixed percent. At the end of the lokata period, the lokata is closed by the bank and the balance with interest (minus automatic 19% tax withholding for non-business accounts) is returned to the current account.

All major Polish banks (e.g. DZ Bank and Bank Zchodni WBK S.A.) offer lokatas to their clients.

Lokata and FBAR Complications

Every time lokata is opened, it is assigned a separate account number. For the purposes of the FBAR, it is a bank account which should be reported on the FBAR separately from the current accounts (contrary to some of the widely-held beliefs among U.S. taxpayers living and working in Poland).

So far, this sounds fairly simple. However, there are serious complications with respect to reporting lokata accounts on the FBAR. First, most current bank account statements are not likely to fully identify lokata accounts.

Second, even where a lokata is identified by a separate number, you still need to make sure that the amount shown on the statements actually reflects the gross amount (i.e. before tax withholding). Usually, it would not and you will need to request the bank to supply a separate bank statement for each lokata and keep track of all gross interest and withholding tax amounts.

Third, the sheer number of lokata accounts can be overwhelming. While there are may be renewable long-term lokatas, oftentimes, it is the opposite. The problem with short-term lokatas is that they terminate once the funds with interest are returned to the current account. This means that a new lokata account is likely to be open every time a new deposit is made. Imagine if a new lokata is opened every week, every three days or every day?! This can be an extremely burdensome requirement for U.S. taxpayers who maintain bank accounts in Poland.

Other problems may arise where the taxpayer needs records for prior years, a lokata is opened in one year and is closed in the following year, et cetera.

Contact Sherayzen Law Office for Help with Reporting Undisclosed Lokata Accounts

If you have undisclosed bank and financial accounts in Poland, contact Sherayzen Law Office for help with your voluntary disclosure. Our team of experienced international tax professionals will thoroughly analyze your case, estimate your current potential FBAR liabilities, propose a solution to your FBAR problems, and implement your voluntary disclosure plan, including preparation of all required legal documents and tax forms.

Non-Resident Alien Spouse and Joint U.S. Tax Return

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This article will cover the options that are available for married couples where one spouse is a non-resident alien and the other is a U.S. citizen. A nonresident alien is an alien who has not passed the green card test or the “substantial presence test” under IRS rules. For the purposes of this article, a “married couple” will refer solely to this specific situation.

Election to File Joint Return

Although a non-resident alien who does not have U.S. source income is generally not required to file a U.S. tax return, in some instances it may be beneficial for a non-resident alien married to a U.S. citizen to do so. If the married couple meets certain criteria, they may elect to file a joint return.

The criteria is as follows: A married couple may elect to treat the non-resident alien as a U.S. resident, if the couple is married at the end of the taxable year. This also includes instances in which one of the spouses is a non-resident alien at the beginning of the year, but becomes a resident alien at the end of the year, and the other spouse is a non-resident alien at the end of the year.

Reason for Electing to File a Joint Return

There are numerous reasons why a non-resident alien in a married couple may elect to file a joint return. For instance, the non-resident alien may have U.S. source income, in which case U.S. taxes will likely be owed in any event. Thus, filing a joint return may result in less taxes paid, depending on tax brackets, type of income and applicable deductions.

It may also make sense in certain circumstances for a non-resident alien who does not have U.S. source income to file a joint return. Additionally, a non-resident alien filing a joint return may be allowed to claim possible credits on foreign income taxes paid, such as the Foreign Tax Credit.

Note however, in certain circumstances, the non-resident alien spouse of the married couple filing the joint return may still be treated as a non-resident alien (such as for the tax purposes of IRC Chapter 3 Withholding, Social Security, or Medicare).

Applicable Rules

Married couples must file a joint return in the year they first elect to treat the non-resident alien as a resident alien for tax purposes. Both spouses will be considered to be residents for tax purposes for all years that the election is in effect. While a joint income return must be filed for the year the election is made, a joint or separate return may be filed in later years.

By electing to file the joint return, both spouses must report all worldwide income on the return. In general, neither spouse will be able to claim tax treaty benefits as a resident of a foreign country in the years in which the election is made, although this will depend upon the specifics of each treaty.

Making The Election

Married couples may make the election by attaching a statement, signed by both spouses, to the joint return for the first tax year that the election is made. (See specific IRS requirements for more details). Married couples may also make the election by filing a amended Form 1040X joint tax return (however, any tax returns filed after the tax year of the amended return must also be amended).

Ending or Suspending the Election

Once the election is made, it will apply to all subsequent tax years, unless it is ended or suspended. An election may be ended by various means, such as the death of either spouse, legal separation, revocation by either spouse, or inadequate records (See Publication 519, U.S. Tax Guide for Aliens, for more details). Once the election is ended, neither spouse may make the election in subsequent tax years.

An election is suspended if neither spouse is a US citizen or resident alien at any time during a later tax year. Married couples may resume the election however if the required criteria are eventually met again in subsequent tax years.

Contact Sherayzen Law Office

This article is intended to give you a brief summary of these issues. If you have further questions regarding these matters as it pertains to your own tax circumstances, Sherayzen Law Office offers professional advice in all of your tax and international tax needs. Call now at (952) 500-8159 to discuss your tax situation with an experienced international tax attorney.