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Panamanian Bank Accounts | US International Tax Lawyer & Attorney

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A large number of US taxpayers own Panamanian bank accounts. These taxpayers have bank accounts in Panama for a variety of reasons: personal, business, tax planning and/or estate planning. Many of these account holders still do not realize that their Panamanian bank accounts may be subject to numerous reporting requirements in the United States. In this essay, I will outline the three most common US tax reporting requirements that may apply to Panamanian bank accounts.

Panamanian Bank Accounts: Definition of a “Filer”

Each of the requirements discussed below has its own eligibility requirements – i.e. each has its own definition of “filer” who is required to comply with these requirements. 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 denominator is the concept of “US tax residency”.

US tax residents include the following persons: US citizens, US permanent residents, persons who satisfy the Substantial Presence Test and persons who declare themselves as US tax residents. It is important to remember that this general definition of US tax residents is subject to a number of important exceptions.

All of the US international tax reporting requirements adopt 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” while FBAR defines its filers as “US Persons”. Yet, the differences between these two terms mostly arise with respect to persons who voluntarily 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.

Panamanian Bank Accounts: Worldwide Income Reporting

Now that we understand the concept of US tax residency, we are ready to explore the aforementioned three US reporting requirements with respect to Panamanian 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.

The worldwide income reporting requirement applies even if the foreign income is subject to Panamanian tax withholding or reported on a Panamanian tax return. It also does not matter whether the income was transferred to the United States or stayed in Panama. US tax residents must disclose their Panamanian-source income on their US tax returns.

Panamanian Bank Accounts: FBAR/FinCEN Form 114

The second requirement that I would like to discuss in this essay 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 Panamanian (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 which the IRS may disregard whenever circumstances warrant such an action.

Panamanian 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 the 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 Panamanian Bank Accounts

If you have Panamanian 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 disclosure of Panamanian bank accounts), and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Retiring in Panama – Tax Traps for U.S. taxpayers

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In recent years, a new retirement trend emerged among U.S. citizens – retirement abroad in relatively peaceful countries of Latin America. Panama appears to be one of the preferred destinations. Retirement is a process, though, and it takes time to set up properly. Therefore, U.S. citizens typically start their preparation for retirement abroad in theirs 50s, before they actually retire. In this article, I wish to discuss some of the most prominent U.S. tax issues that these potential retirees may face.

Typical Retirement Process

At lot of U.S. citizens who make the decision to retire in Panama start the process by retaining a local attorney to acquire land. They open up an account in Panama to finance the deal. Then, they sign a contract with a construction company to build a house. At that point, most Panamanian lawyers typically advise to organize a Panamanian corporation and put the house into the corporation for the purported reasons of liability and privacy. The house construction is then financed by the owner’s funds through new Panamanian corporate accounts. After the house is built, the lawyers will then attempt to obtain an exoneration of the property from Panamanian taxation for a fixed number of years allowed by law.

Throughout the process, the U.S. citizens are advised by Panamanian tax advisors that there are not tax consequences for structuring the retirement home purchase and construction through a corporation.

Tax Problems with this Process

Despite the apparent innocence of this project, there are potentially large problems with it if the U.S. tax citizens are not independently advised of the U.S. tax consequences of structuring their retirement in this manner.

Let’s take this scenario apart and focus on the three most common problems here. First, the opening of the bank accounts. If the aggregate balance on these accounts exceeds $10,000, then the Report on Foreign Bank and Financial Accounts must be filed by U.S. taxpayers. Failure to do so may bring tremendous IRS penalties, civil and criminal.

The interesting point here is that, in calculation of the aggregate $10,000 balance, a U.S. taxpayer should take into account the corporate accounts over which he has signature authority if owns more than 50% of the corporation (directly or constructively).

Second, organizing a Panamanian corporation owned by U.S. taxpayers may bring forth another highly-complicated U.S. tax compliance feature – Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Depending on the asset valuation (under US GAAP) and some other features of the corporation, Form 5471 can become a truly monstrous compliance requirement for this seemingly simple transaction of buying a retirement house through a corporation. Failure to file Form 5471 can lead to substantial penalties depending on circumstances.

Third, there is a new Form 8938 that requires U.S. taxpayers to disclose information with respect to specified foreign assets as long as these assets exceed a certain threshold. The Form has its own penalty structure.

The truly tragic aspect of this scenario is that a large number of Panamanian attorneys are completely oblivious to these U.S. tax reporting requirements as well as the penalties associated with them. Therefore, they fail to advise their U.S. clients about these IRS requirements and that the clients should consult a U.S. tax attorney experienced in these matters.

This is why it is highly important that you consult with a U.S.-based international tax attorney regarding U.S. tax consequences of your particular foreign retirement plan.

Contact Sherayzen Law Office to Learn About U.S. Tax Consequences of Your Foreign Asset Ownership and Retirement

The above article does not summarize all of the tax forms that should be filed in such situations, but merely points out the most prominent ones.  The exact U.S. tax compliance requirements will also depend on your particular situation.

If you are a U.S. citizen who is planning to retire in Panama or you wish own a property or do business there, you should contact Sherayzen Law Office. Our experienced international tax firm will analyze your situation in depth and offer professional legal advice with respect to your particular situation.