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, 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!