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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!

Main Worldwide Income Reporting Myths | International Tax Attorney St Paul

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In a previous article, I discussed the worldwide income reporting requirement and I mentioned that I would discuss the traps or false myths associated with this requirement in a future article. In this essay, I will keep my promise and discuss the main worldwide income reporting myths.

Worldwide Income Reporting Myths: the Source of Myths

I would like to begin by reminding the readers about what the worldwide income reporting rule requires. The worldwide income reporting requirement states that all US tax residents are obligated to disclose all of their US-source income and foreign-source income on their US tax returns.

This rule seems clear and straightforward. Unfortunately, it does not coincide with the income reporting requirements of many foreign tax systems. It is precisely this tension between the US tax system and tax systems of other countries that gives rise to numerous false myths which eventually lead to the US income tax noncompliance. Let’s go over the four most common myths.

Worldwide Income Reporting Myths: Local Taxation

Many US taxpayers incorrectly believe that their foreign-source income does not need to be disclosed in the United States because it is taxed in the local jurisdiction. The logic behind this myth is simple – otherwise, the income would be subject to double taxation. There is a variation on this myth which relies on various tax treaties between the United States and foreign countries on the prevention of double-taxation.

The “local taxation” myth is completely false. US tax law requires US tax residents to disclose their foreign-source income even if it is subject to foreign taxation or foreign tax withholding. These taxpayers forget that they may be able to use the foreign tax credit to remedy the effect of the double-taxation.

Where the foreign tax credit is unavailable or subject to certain limitations, the danger of double taxation indeed exists. This is why you need to consult an international tax attorney to properly structure your transactions in order to avoid the effect of double-taxation. In any case, the danger of double taxation does not alter the worldwide income reporting requirement – you still need to disclose your foreign-source income even if it is taxed locally.

The tax-treaty variation on the local taxation myth is generally false, but not always. There are indeed tax treaties that exempt certain types of income from US taxation; the US-France tax treaty is especially unusual in this aspect. These exceptions are highly limited and usually apply only to certain foreign pensions.

Generally, however, tax treaties would not prevent foreign income from being reportable in the United States. In other words, one should not turn an exception into a general rule; the existence of a tax treaty would not generally modify the worldwide income reporting requirement.

Worldwide Income Reporting Myths: Territorial Taxation

Millions of US taxpayers were born overseas and their understanding of taxation was often formed through their exposure to much more territorial systems of taxation that exist in many foreign countries. These taxpayers often believe that they should report their income only in the jurisdictions where the income was earned or generated. In other words, the followers of this myth assert that US-source income should be disclosed on US tax returns and foreign-source income on foreign tax returns.

This myth is false. US tax system is unique in many aspects; its invasive worldwide reach stands in sharp contrast to the territorial or mixed-territorial models of taxation that exist in other countries. Hence, you cannot apply your prior experiences with a foreign system of taxation to the US tax system. With respect to individuals, US tax laws continue to mandate worldwide income reporting irrespective of how other countries organize their tax systems.

Worldwide Income Reporting Myths: De Minimis Exception

The third myth has an unclear origin; most likely, it comes from human nature that tends to disregard insignificant amounts. The followers of this myth believe that small amounts of foreign source income do not need to be disclosed in the United States, because there is a de minimis exception to the worldwide income reporting requirement.

This is incorrect: there is no such de minimis exception. You must disclose your foreign income on your US tax return no matter how small it is.

This myth has a special significance in the context of offshore voluntary disclosures. The Delinquent FBAR Submission Procedures can only be used if there is no income noncompliance. Oftentimes, taxpayers cannot benefit from this voluntary disclosure option, because they failed to disclose an interest income of merely ten or twenty dollars.

Worldwide Income Reporting Myths: Foreign Earned Income Exclusion

Finally, the fourth myth comes from the misunderstanding of the Foreign Earned Income Exclusion (the “FEIE”). The FEIE allows certain taxpayers who reside overseas to exclude a certain amount of earned income on their US tax returns from taxation as long as these taxpayers meet either the physical presence test or the bona fide residency test.

Some US taxpayers misunderstand the rules of the FEIE and believe that they are allowed to exclude all of their foreign income as long as they reside overseas. A variation on this myth ignores even the residency aspect; the taxpayers who fall into this trap believe that the FEIE excludes all foreign income from reporting.

This myth and its variation are wrong in three aspects. First of all, even in the case of FEIE, all of the foreign earned income must first be disclosed on a tax return and then, and only then, would the taxpayer be able to take the exclusion on the tax return. Second, the FEIE applies only to earned income (i.e. salaries or self-employment income), not passive income (such as bank interest, dividends, royalties and capital gains). Finally, as I already stated, in order to be eligible for the FEIE, a taxpayer must satisfy one of the two tests: the physical presence test or the bona fide residency test.

Contact Sherayzen Law Office for Professional Help With Your Worldwide Income Reporting

Worldwide income reporting can be an incredibly complex requirement despite its appearance of simplicity. In this essay, I pointed out just four most common traps for US taxpayers; there are many more.

Hence, if you have foreign income, contact Sherayzen Law Office for professional help. Our highly-experienced tax team, headed by a known international tax lawyer, Mr. Eugene Sherayzen, has helped hundreds of US taxpayers to bring themselves into full compliance with US tax laws. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

4th Quarter 2018 Underpayment and Overpayment Interest Rates

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On September 7, 2018, the IRS announced that the 4th Quarter 2018 underpayment and overpayment interest rates will not change from the 3rd Quarter of 2018.

This means that, the 4th quarter 2018 IRS underpayment and overpayment interest rates will be as follows:

  • five (5) percent for overpayments (four (4) percent in the case of a corporation)
  • five (5) percent for underpayments
  • seven (7) percent for large corporate underpayments; and
  • two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. This means that the next change in the IRS underpayment and overpayment interest rates may occur only for the 1st Quarter of 2019. In fact, if the analysts are correct, it may very well happen in early 2019.

The 4th Quarter 2018 underpayment and overpayment interest rates are important for many reasons. Not only are these rates used to determine what the IRS will charge in case of an amended tax return (including an amended return made as part of an offshore voluntary disclosure), but they will also determine the interest rate for any adjustments made by the IRS during an audit.

Moreover, the IRS underpayment rates are used to calculate the interest charged on the PFIC (default IRC Section 1291) tax due on an excess distribution. It should be remembered that PFIC calculations de facto remain outside of the Statute of Limitations and PFIC interest can be charged on any PFIC gains made in 2018 but allocated to any prior year (all the way to 1988).

It is important to prevent some US tax accountants from falling into a common trap concerning distributions of accumulated income from a foreign trust. There is a myth that the interest rates on UNI tax is calculated based on the IRS underpayment and overpayment interest rates. This is incorrect – the Throwback Rule follows a separate method for calculating the interest on the UNI tax.

Sherayzen Law Office continues to track any changes IRS makes to its overpayment and underpayment interest rates.