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Costa Rican Bank Accounts | International Tax Lawyer & Attorney Miami

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Upon moving to Costa Rica, many US retirees open Costa Rican bank accounts in order to pay for their local expenses and purchase properties. While to US retirees their Costa Rican bank accounts seem innocent and completely unrelated to US tax laws, the ownership of these accounts may put them at a significant risk for US tax noncompliance. In this article, I would like to discuss the top three US reporting requirements with which US owners of the Costa Rican bank accounts need to comply.

Costa Rican Bank Accounts: Who Must Report Them?

Before we discuss these US tax requirements in more detail, we need to make it clear that, generally, only US tax residents must comply with these requirements. The definition of a US tax resident is broad and includes US citizens, US permanent residents, an individual who declares himself a US tax resident.

A couple of words of caution. First, there are important exceptions to this general definition of a US tax resident. For example, students on an F-1 visa are generally exempt from the Substantial Presence Test for five years. It is the job of your international tax attorney to determine whether you fall within any of these exceptions.

Second, different information returns may modify the categories of persons which are included in the category of the required filers. In other words, while it is generally true that US tax residents are the ones who are required to comply with the US tax requirements concerning Costa Rican bank accounts, there are important, though limited exceptions. The most prominent example is FBAR discussed below; the form requires “US persons”, not “US tax residents” to disclose the ownership of foreign accounts. While these two concepts are similar, they are not exactly the same.

Costa Rican Bank Accounts: Worldwide Income Reporting

All US tax residents must report their worldwide income on their US tax returns. In other words, US tax residents must disclose both US-source and foreign-source income to the IRS. In the context of the Costa Rican bank accounts, foreign-source income would usually include bank interest income, but this concept also covers dividends, royalties, capital gains and any other income generated by the Costa Rican bank accounts.

Costa Rican Bank Accounts: FBAR Reporting

The official name of the Report of Foreign Bank and Financial Accounts (“FBAR”) is FinCEN Form 114. FBAR requires all US tax persons to disclose their ownership interest in or signatory authority or any other authority over Costa Rican bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000.

Note that the term “US persons” is very close to “US tax residents”, but it is not the same. The term “US tax residents” is slightly broader than “US persons”. I have already discussed the definition of US persons in a series of articles (for example, see this article on individuals who are considered US persons); hence, I will not discuss it here, but I urge the readers to search sherayzenlaw.com for more materials on this subject.

There is one aspect of the FBAR requirement that I wish to explain in more detail here – the definition of an “account”. The FBAR definition of an account is substantially broader than how this word is generally understood by taxpayers. “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.

The final aspect of FBAR that I wish to discuss here is its penalty system. US taxpayers dread FBAR penalties which are supremely severe to an astonishing degree. At the apex are the criminal penalties with up to 10 years in jail (of course, these penalties come into effect only in the most egregious situations). While FBAR willful civil penalties do not threaten incarceration, they are so harsh that they can easily exceed a person’s net worth. Even taxpayers who non-willfully did not file an FBAR (either because they did not know about it or due to circumstances beyond their control) are not free from FBAR penalties. Since 2004, the Congress added non-willful FBAR penalties of up to $10,000 per account per year.

In order to mitigate the potential for the 8th Amendment challenges to FBAR penalties and make the penalty imposition more flexible, the IRS created a multi-layered system of penalty mitigation. Since 2015, the IRS has added additional limitations on the FBAR penalty imposition. These self-imposed limitations of course help, but one must keep in mind that they are voluntary IRS actions and maybe disregarded under certain circumstances (in fact, there are already a few instances where this has occurred).

Costa Rican Bank Accounts: FATCA Form 8938

Form 8938 is one of the most important and relatively recent additions to the numerous US international tax requirements. The IRS created Form 8938 under the Foreign Account Tax Compliance Act (“FATCA”) in 2011.

Form 8938 is filed with a federal tax return. This means that, without Form 8938, the tax return would not be complete and, potentially, open to an IRS audit.

The primary focus of Form 8938 is on the reporting by US taxpayers of Specified Foreign Financial Assets (“SFFA”). SFFA includes a very diverse range of foreign financial assets, including: foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera.

In some ways, Form 8938 requires the reporting of the same assets as FBARs (especially with respect to foreign bank and financial accounts), but the two requirements are independent. This means that a taxpayer may have to do duplicate reporting on FBAR and Form 8938.

Form 8938 has a filing threshold that depends on a taxpayer’s tax return filing status and his physical residency. For example, if a taxpayer is single and resides in the United States, he needs to file Form 8938 as long as the aggregate value of his SFFA is more than $50,000 at the end of the year or more than $75,000 at any point during the year.

Form 8938 needs to be filed by Specified Persons. Specified Persons consist of two categories: Specified Individuals and Specified Domestic Entities. There are specific definitions for both categories; you can find them by searching our website sherayzenlaw.com.

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

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

Foreign income reporting, FBAR and Form 8938 do not constitute a complete list of requirements that may apply to Costa Rican bank accounts. There may be many more.

If you have Costa Rican bank accounts, contact the experienced international tax attorney and owner of Sherayzen Law Office, Mr. Eugene Sherayzen. Mr. Sherayzen has helped hundreds of US taxpayers with their US international tax issues, and He can help You!

Contact Mr. Sherayzen Today to Schedule Your Confidential Consultation!

Colombian Bank Accounts | International Tax Lawyer & Attorney Miami

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Even today many US owners of Colombian bank accounts remain completely unaware of the numerous US tax requirements that may apply to them. The purpose of this essay is to educate these owners about the requirement to report income generated by these accounts in the United States as well as the FBAR and FATCA obligations concerning the disclosure of ownership of Colombian bank accounts to the IRS.

Colombian Bank Accounts: Individuals Who Must Report Them

Before we discuss the aforementioned requirements in more detail, we need to determine who is required to comply with them. In other words, is every Colombian required to file FBAR in the United States? Or, does this obligation apply only to certain individuals?

The answer is very clear: only Colombians who fall within one of the categories of US tax residents must comply with these requirements. US tax residents include US citizens, US Permanent Residents, an individual who satisfies the Substantial Presence test and an individual who properly declares himself a US tax resident. There are important exceptions to this general rule, but, if you fall within any of these categories, you need to contact an international tax attorney as soon as possible to determine your US tax obligations concerning your ownership of Colombian bank accounts.

Colombian Bank Accounts: Income Reporting

All US tax residents are subject to the worldwide income reporting requirement. In other words, they must disclose on their US tax returns not only their US-source income, but also their foreign income. The latter includes all bank interest income, dividends, royalties, capital gains and any other income generated by Colombian bank accounts.

The worldwide income reporting requirement also requires the disclosure of PFIC distributions, PFIC sales, Subpart F income and GILTI income. These are complex requirements which are outside the scope of this article, but US owners of Colombian bank accounts need to be aware of the existence of these requirements.

Colombian Bank Accounts: FinCEN Form 114 (FBAR)

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”) mandates US tax residents to disclose their ownership interest in or signatory authority or any other authority over Colombian bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. Every part of this sentence has a special significance and contains a trap for the unwary.

The most dangerous of these traps is the definition of an “account”. The FBAR definition of account is much broader than how this word is generally understood by taxpayers. For the purposes of FBAR compliance, this term 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, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset.

FBAR has its own intricate penalty system which is widely known for its severity. The FBAR penalties range from incarceration to willful and even non-willful penalties which may easily exceed the value of the penalized accounts. In order to circumvent the potential 8th Amendment challenges and make the penalty imposition more flexible, the IRS has implemented a system of self-imposed limitations, but it is a completely voluntary system (i.e. the IRS can, and in fact already did several times, disregard these limitations).

Colombian Bank Accounts: FATCA Form 8938

While Form 8938 is a relative newcomer (since tax year 2011), it has occupied a special place among the US international tax requirements. In fact, one could argue that it is currently as important as FBAR for US taxpayers with Colombian bank accounts.

The Foreign Account Tax Compliance Act (“FATCA”) gave birth to Form 8938, making it part of a taxpayer’s federal tax return. This means that a failure to file Form 8938 may render the entire federal tax return incomplete, and the IRS may be able to audit the return. Immediately, we can see the profound impact Form 8938 has on the Statute of Limitations for the entire tax return.

Given the fact that it is a direct descendant of FATCA, it is not surprising Form 8938’s primary focus is on foreign financial assets. Form 8938 requires a US taxpayer to disclose all Specified Foreign Financial Assets (“SFFA”) as long as he satisfies the relevant filing threshold. The filing thresholds differ depending on the filing status and the place of residence (i.e. inside or outside of the United States) of the taxpayer.

SFFA includes an enormous variety of foreign financial assets, including foreign bank and financial accounts. In fact, with respect to bank and financial accounts, Form 8938 is very similar to FBAR, which often results in double-reporting of the same assets. It is important to emphasize that Form 8938 does not replace FBAR, both forms must still be filed. In other words, US taxpayers should report their Colombian bank accounts on FBAR and disclose them again on Form 8938.

Form 8938 has its own penalty system which contains some unique elements. In addition to its own $10,000 failure-to-file penalty, Form 8938 directly affects the accuracy-related income tax penalties and the ability of a taxpayer to use foreign tax credit.

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

US international tax compliance is extremely complex. It is very easy to get yourself into trouble, and much more difficult and expensive to get yourself out of this trouble. If you have Colombian bank accounts, contact the experienced international tax attorney and owner of Sherayzen Law Office, Mr. Eugene Sherayzen. Mr. Sherayzen has helped hundreds of US taxpayers with their US international tax issues, and He can help You!

Contact Mr. Sherayzen Today to Schedule Your Confidential Consultation!

Worldwide Income Reporting Requirement | IRS International Tax Lawyer

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Worldwide income reporting is at the core of US international tax system. Yet, every year, a huge number of US taxpayers fail to comply with this requirement. While some of these failures are willful, most of this noncompliance comes from misunderstanding of the worldwide income reporting requirement. In this essay, I will introduce the readers to the worldwide income reporting requirement and explain who must comply with it.

Worldwide Income Reporting Requirement: Who is Affected

It is important to understand that the worldwide income reporting requirement applies to all US tax residents. US tax residents include US citizens, US Permanent Residents (the so-called “green card” holders), taxpayers who satisfied the Substantial Presence Test and non-resident aliens who declared themselves US tax residents on their US tax returns. This is the general definition and there are certain exceptions, including treaty-based exceptions.

Worldwide Income Reporting Requirement: What Must Be Disclosed

The worldwide income reporting requirement mandates US tax residents to disclose all of their US-source income and all of their foreign-source income on their US tax returns. This seems like a very straightforward rule, but its practical application creates many tax traps for the unwary, which I will discuss in a future article.

Worldwide Income Reporting Requirement: Constructive Income and Anti-Deferral Regimes

It is important to emphasize that the worldwide income reporting requirement requires the disclosure not only of the income that you actually received, but also the income that you are deemed to have received by the operation of law. In other words, US tax residents must also disclose their constructive income.

One of the most common sources of constructive income in US international tax law are Anti-Deferral regimes that arise from the ownership of a foreign corporation. The two most common regimes are Subpart F rules (which apply only to a Controlled Foreign Corporation) and the brand-new GILTI  regime. You can find out more about these two highly-complex US tax laws by searching the articles on our website.

Contact Sherayzen Law Office for Professional Help With the Worldwide Income Reporting Requirement

The worldwide income reporting requirement can be extremely complex; you can easily get yourself into trouble with the IRS over this issue. In order to avoid making costly mistakes and correct prior US tax noncompliance in the most efficient manner, you should contact Sherayzen Law Office help. We have helped hundreds of US taxpayers to comply with their US international tax obligations with respect to foreign income and foreign assets, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Mexican Bank Accounts & US Tax Obligations | International Tax Lawyers

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In this essay, I would like to discuss three main US tax obligations concerning Mexican bank accounts: the worldwide income reporting requirement, FBAR and Form 8938. I will only concentrate on the obligations concerning individuals, not business entities.

Mexican Bank Accounts and US Tax Residents

Before we delve into the discussion concerning US tax obligations, we should establish who is required to comply with these obligations. In other words, who needs to report their Mexican bank accounts to the IRS?

The answer to this question is clear: US tax residents. Only US tax residents must disclose their worldwide income and report their Mexican bank accounts on FBAR and Form 8938. Non-resident aliens who have never declared themselves as US tax residents do not need to comply with these requirements.

US tax residents include US citizens, US Permanent Residents, an individual who satisfied the Substantial Presence test and an individual who properly declares himself a US tax resident. This is, of course, the general rule; important exceptions exist to this rule.

Mexican Bank Accounts: Worldwide Income Reporting Requirement

US tax residents must disclose their worldwide income on their US tax returns, including any income generated by Mexican bank accounts. In other words, all interest, dividend and royalty income produced by these accounts must be reported on Form 1040. Similarly, any capital gains from sales of investments held in Mexican bank accounts should also be disclosed on Form 1040. US taxpayers should pay special attention to the reporting of PFIC distributions and PFIC sales.

It is also possible that you may have to disclose passive income generated by your Mexican business entities through the operation of Subpart F rules and the GILTI regime, but this is a topic for a separate discussion.

Mexican Bank Accounts: FBAR

US tax residents must disclose on FBAR their ownership interest in or signatory authority or any other authority over Mexican bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. FBAR is a common acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. Even though this is a FinCEN Form, the IRS is charged with the enforcement of this form since 2001.

While seemingly simple, FBAR contains a number of traps for the unwary. One of the most common trap is the definition of “account”. For the FBAR purposes, “account” has a much broader definition than what people generally think of as an account. ‘Account” includes not just regular checking and savings accounts, but also investment accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a financial institution and a US person’s foreign asset.

FBAR is a very dangerous form. Not only is the filing threshold very low, but there are huge penalties for FBAR noncompliance. For a willful violation, the penalties can go up to $100,000 (adjusted for inflation) per account per year or 50% of the highest value of the account per year, whichever is higher. In special circumstances, the IRS may refer FBAR noncompliance to the US Department of Justice for criminal prosecution. Even non-willful FBAR penalties may go up to $10,000 (again, adjusted for inflation) per account per year.

Mexican Bank Accounts: FATCA Form 8938

The final requirement that I wish to discuss today is the FATCA Form 8938. Born out of the Foreign Account Tax Compliance Act, Form 8938 occupies a unique role in US international tax compliance. On the one hand, it may result in the duplication of a taxpayer’s US tax disclosures (especially with respect to the accounts already disclosed on FBAR). On the other hand, however, Form 8938 is a “catch-all” form that fills the compliance gaps with respect to other US international tax forms.

For example, if a taxpayer holds a paper bond certificate, this asset would not be reported on FBAR, because it is not an account. For the Form 8938 purposes, however, the IRS would consider this certificate as part of assets that fall within the definition of the Specified Foreign Financial Assets (“SFFA”).

Hence, the scope of Form 8938 is very broad. It requires a specified person (this term is almost equivalent to a US tax resident) to disclose all SFFA as long as these SFFA, in the aggregate, exceed the applicable filing threshold.

SFFA includes a huge variety of foreign financial assets which are divided into two sub-categories: (a) foreign bank and financial accounts; and (b) “other” foreign financial assets. The definition of the “other” assets is impressive in its breadth: bonds, stocks, ownership interest in a closely-held business, beneficiary interest in a foreign trust, 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; an option or other derivative instrument with respect to any currency or commodity that is entered into with a foreign counterparty or issuer; and so on.

Form 8938 requires not only the reporting of SFFA, but also the income generated by the SFFA. In essence, the worldwide income reporting requirement is incorporated directly into the form.

The filing threshold for Form 8938 is more reasonable than that of FBAR for specified persons who reside in the United States, but it is still fairly low (especially for individuals). For example, if a taxpayer lives in the United States, he will need to file Form 8938 if he has SFFA of $50,000 ($100,000 for a married couple) or higher at the end of the year or $75,000 ($150,000 for a married couple) or higher during any time during the year. Specified persons who reside outside of the United States enjoy much higher thresholds.

Form 8938 has its own penalty system which contains some unique elements. First of all, a failure to comply with the Form 8938 requirements may allow the IRS to impose a $10,000 failure-to-file penalty which may go up to as high as $50,000 in certain circumstances. Second, Form 8938 noncompliance will lead to an imposition of much higher accuracy-related penalties on the income tax side – 40% of the additional tax liability. Third, Form 8938 noncompliance will limit the taxpayer’s ability to utilize the Foreign Tax Credit.

Finally, a failure to file Form 8938 will directly affect the Statute of Limitations of the entire tax return by extending the Statute to the period that ends only three years after the form is filed. In other words, Form 8938 penalties may allow the IRS to audit tax years which otherwise would normally be outside of the general three-year statute of limitations.

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

Sherayzen Law Office’s core area of practice is international tax compliance, including offshore voluntary disclosures – i.e. helping US taxpayers with foreign assets and foreign income to stay in US tax compliance and, if a taxpayer fails failed to comply with US tax laws in the past, bring him into compliance through an offshore voluntary disclosure. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

IRS Waives 2018 Estimated Tax Penalty for Certain Taxpayers | Tax News

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On January 16, 2019, the IRS announced that it would waive the 2018 estimated tax penalty for taxpayers who paid at least 85% of their total tax liability during 2018, either through federal income tax withholding, quarterly estimated tax payments or the combination of both of these payment methods. These changes will be integrated in the forthcoming revision of Form 2210 and instructions.

The 85% threshold is a reduction from the usual 90% threshold required to avoid a penalty. It appears that this new limitation will apply only to the 2018 estimated tax penalty.

Why did the IRS single out the 2018 estimated tax penalty for this additional relief? Very simple – the IRS is trying to help the taxpayers who were unable to properly calculate the needed tax withholding and estimated tax payments due to the numerous changes to tax laws introduced by the 2017 Tax Cuts and Jobs Act.

The IRS probably also feels that its own federal tax withholding tables could have contributed to underpayment of tax by many taxpayers. When they were released in early 2018, the updated federal tax withholding tables reflected only the lower tax rates and the increased standard deduction. The tables, however, did not fully reflect other changes, such as the elimination of personal exemptions (including exemptions for dependents) and the severe limitations placed on  itemized deductions. Hence, if a taxpayer relied on the federal tax withholding tables, he would have been unfairly exposed to the 2018 estimated tax penalty had the IRS refused to grant this relief.

In all fairness, it should be mentioned that the IRS attempted to correct its mistake by initiating a very extensive education campaign (which also involved all IRS partner groups) for taxpayers with respect to the need to check on their tax withholding.

It is important to point out that the taxpayers should pay a lot more attention to their tax withholding for 2019 so that a 2018 estimated tax penalty does not turn into a 2019 estimated tax penalty. This is especially true for taxpayers who will now owe (maybe, somewhat unexpectedly for them) taxes on their tax returns. The highest-risk taxpayers are, of course, those who have itemized their deductions and complex income. Sherayzen Law Office also warns that taxpayers with foreign income are within this high-risk category.