
Knowing What Counts Podcast
Welcome to the Knowing What Counts Podcast, your go-to resource for expert financial guidance tailored to high-net-worth individuals and thriving businesses. Hosted by the experienced professionals at MP CPAs, this podcast dives deep into strategies that help you protect, optimize, and grow your wealth. From tax planning and wealth management to business strategy and financial decision-making, we bring you the tools and insights to navigate your financial journey with confidence. Tune in and discover why success truly begins with knowing what counts!
Whether you’re looking to streamline your business operations, minimize tax liabilities, or make smart investment choices, our team of experts is here to provide clarity and direction. Stay tuned until the end for valuable tips that you can start implementing today. Don’t forget—your path to financial success starts here!
To learn more about MP CPAs visit:
thempgroupcpa.com
MP CPAs
413-739-1800
Knowing What Counts Podcast
Beyond Borders: Understanding Your Foreign Tax Obligations
Global Compliance: Tackling Foreign Tax Filings
The hidden complexities of foreign tax compliance often catch even savvy taxpayers by surprise. Tax Supervisor Alex Leslie of MP CPAs draws from a decade of experience to illuminate the maze of international tax reporting requirements that affect Americans with global financial interests.
Most US taxpayers don't realize they're subject to taxation on worldwide income regardless of where it's earned. When foreign accounts or investments enter the picture, multiple disclosure forms become mandatory - not optional. The podcast breaks down critical filing requirements including the Foreign Bank Account Report (FBAR) for accounts exceeding $10,000, Form 8938 for specified foreign financial assets, Form 8865 for foreign partnership interests, and Form 8621 for investments in Passive Foreign Investment Companies (PFICs).
What makes these requirements particularly challenging is their low thresholds and the severe penalties for non-compliance - potentially tens of thousands of dollars per violation. Even more concerning, many taxpayers unknowingly hold reportable foreign investments through domestic partnerships or investment funds without realizing the disclosure obligations that flow through to them personally. The discussion provides clear guidance on identifying these hidden requirements by carefully reviewing investment documents and working proactively with knowledgeable tax professionals.
Whether you're maintaining accounts abroad, investing internationally, or simply concerned about potential foreign reporting obligations, this episode delivers essential insights for protecting your financial future. Don't wait for the IRS to discover overseas assets - take control of your global tax compliance today by understanding these critical reporting requirements.
To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800
Welcome to the Knowing what Counts podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started, because success begins with Knowing what Counts. Because success begins with knowing what counts.
Speaker 2:Are you confident you're meeting all your global tax obligations? In this episode of Knowing what Counts, the experienced professionals at MPCPAs unpack the complexities of foreign tax filings. Welcome back everyone. I'm Sofia Yvette, co-host slash producer, back in the studio with Alex Leslie, tax supervisor at MPCPAs. Alex, how's it going today?
Speaker 3:It's going pretty good. How are you today, Sofia?
Speaker 2:I'm also doing good, and that's great to hear. Alex, let's go ahead and get started here. Can you tell our listeners a bit about yourself?
Speaker 3:you tell our listeners a bit about yourself. Yes, as you mentioned, my name is Alex Leslie. I am a CPA. I am a tax supervisor here at MPCPAs and I've been with the firm for almost 10 years now.
Speaker 2:Wow. Well, that's great to hear. Let's go ahead and get into it a bit more. So, Alex, let's go into discussing how to prepare for global compliance and how to go about tackling foreign tax filings the right way. So how do you ensure compliance with both US and foreign tax laws when preparing tax returns for multinational clients? Returns for multinational clients.
Speaker 3:Well, the first thing to note is that, for all US citizens, the United States takes what they describe as a global income approach, and so what that means is they tax you on all of your income, regardless of what country it comes from, and then typically, if a foreign jurisdiction also taxes that income, you will be entitled to a credit to offset some of the US tax on that foreign sourced income.
Speaker 3:Now, the key thing to note is that the United States has many tax treaties with all the different countries around the world, and so how the two countries, the US andS and the foreign counterpart, interact with each other depends on that specific treaty, and there's kind of no real one-size-fits-all relationship with all the countries out there, and so the rules can vary depending on which country you're dealing with, and we do have resources that we can connect clients with an accountant in those foreign countries to handle the compliance in that country, and we mostly focus on the US aspects of filing and the compliance with the United States. And then, in relation to that, there are various different disclosure forms that you'll need to file if you have money in foreign bank accounts or invest or own foreign entities, and that's going to be a lot of what we focus on here in this episode.
Speaker 2:So, alex, what filing requirements am I subject to if I own a bank account in a foreign country, and what information am I required to disclose to the government?
Speaker 3:Okay, so for foreign bank accounts, there's two main forms you're going to want to look out for. The first form is called Form 114, or the Report of Foreign Bank and Financial Accounts, often abbreviated as FBAR, and so the FBAR is required if you have signature authority over an account that is located in a foreign country. An account that is located in a foreign country, and so this requirement will kind of kick in if the aggregate value of all of your foreign bank accounts exceeds $10,000 at any point during the year, and it may be an account that you own, or it could also be an account that is owned by a business that you own, where you are the person who has signature authority over that account. So it could be the case where both the business and yourself will need to disclose and file on separate FBARs, and then so the FBAR report will get filed with the Financial Crimes Enforcement Network, or FinCEN, and the different type of information that you'll be required to file on this form is the type of account that you're holding, the name of the financial institution that oversees the account, the institution's mailing address, the account number and then the maximum value of that account during the year.
Speaker 3:And then so, for the Form 8938, which is the other form that you may have to file to disclose foreign banking information. It kind of has a lot of the same information as the FBAR, including the name of the financial institution, mailing address, account number and maximum value, but the filing thresholds are slightly different. And so single taxpayers, other unmarried individuals the thresholds is if the aggregate value of all the accounts is $50,000 or more at the end of the year or if at any time during the year it's $75,000. And then if you're married, you would have to report on the 8938. That's different than the FBAR is. You would have to disclose if the account is maintained in a foreign currency and which currency that is, and then you would also need to require or disclose if it is a deposit account or a custodial account, and then so this report actually gets filed with the IRS as part of your tax return. So it's going to go to a different place than the FBAR will.
Speaker 2:Understood and what other types of accounts would I be required to disclose on these two forms?
Speaker 3:So the most common that we've already discussed is your bank accounts, but they would also require to disclose any type of financial accounts held in a foreign country, and so some of these examples might be a foreign brokerage account or a foreign retirement account you would also need to disclose, and that would need to be disclosed on both the FBAR and the 8938. And then the 8938 even goes a step further. So if you own stock in a foreign corporation that is held outside of a financial account, so you just own it directly yourself, you don't own it through a brokerage account or anything like that you would still need to disclose that on the 8938. And it's the same thing if you own an interest in a foreign partnership or an interest in a foreign hedge fund or a private equity fund. So there's a bit more types of assets you would need to disclose on the 8938.
Speaker 2:In addition to the FBAR, are there other forms I may need to file to report these accounts?
Speaker 3:Yes, so if you invest in different entities, either directly or indirectly, you may need to file different forms depending on what type of entity you're invested in, if you hold an asset or if you purchase a new asset or things like that. And so those different entities that you may own that would subject you to these additional filing requirements are going to be your foreign partnerships, your foreign corporations. And then there's a special type of foreign corporation, which we'll get into a little later, called the passive foreign investment corporation when would I need to be concerned about investing in a foreign partnership?
Speaker 3:okay, so investing in a foreign partnership might subject you to a filing requirement for form 8865 and so on the 8865. There are four different categories of filers, and so if you file under one or more of these types of categories, you would be subject to this reporting requirement. And so the first category Category 1, is if you own a controlling interest in that partnership, and that typically means you own more than 50% interest of that partnership. And that typically means you own more than 50% interest of that partnership. The second category, category two would be if you own at least a 10% interest in that partnership and, combined with other US partners that also own at least 10%, you control the company. Nobody owns greater than 50% by themselves.
Speaker 3:And then the third category would be if you contribute property to the partnership during the year and either you own at least a 10% interest after you make the contribution or the value of the property you contributed exceeds $100,000, you would also need to file this form as a Category 3 filer.
Speaker 3:And then the last category Category 4, is if you have what they call a reportable event under Code Section 6046A during the year, and the most common examples of these reportable events are if you own less than 10% and then acquire enough interest in that partnership to put you over the 10% threshold during that year, it would be considered a Category 4 filer that year. Or if you own more than 10% and you dispose of an interest in that partnership to bring you below 10%, that would also trigger a Category 4 filing requirement. And each one of these categories has different reporting requirements. So I guess my key piece of advice here is if you believe you fall under any one of these four categories, I would recommend reaching out to your tax advisor so you can discuss the implications of what you may need to file and to disclose.
Speaker 2:So, alex, you mentioned a passive foreign investment company. What is that and what filing requirements should I be concerned about?
Speaker 3:Yes, so a passive foreign investment company is a special type of foreign corporation, and so there's two different tests that the passive foreign investment company needs to clear, and if any of one of these tests are met, then it's considered a passive foreign investment company is to clear, and if any of one of these tests are met, then it's considered a passive foreign investment company, often abbreviated as a PFIC. And so the first test is going to be your income test, and so that means that the foreign corporation at least 75% or more of the corporation's gross income for the year, is considered passive type income, and so different types of passive income would be things like interest income, dividends income, capital gains income, so those types of things. And then the second test is going to be your asset test. So if, during the year, on average, at least 50% of the corporation's assets are assets that are used to produce those types of passive income or are held for the purpose of producing that passive income, then they're going to be considered a PFIC under the asset test. And then so if you do own a PFIC, you're required to file it if you are either a direct owner or an indirect owner of the PFIC, and so you would be considered an indirect owner if one of the next couple things would apply.
Speaker 3:So different types of indirect owners are if you're a 50% or more shareholder in a foreign corporation that is not a PFIC but that PFIC owns stock, or that foreign corporation excuse me owns stock in a corporation that is a PFIC, either directly or indirectly, then you would be considered an indirect owner.
Speaker 3:A shareholder in a PFIC where that PFIC itself owns another PFIC, you would be considered an indirect owner of the second PFIC. And then 50% or more shareholder of a domestic corporation where the domestic corporation owns a special type of PFIC known as a Section 1291 fund would be considered an indirect owner. And lastly, the one that I see the most often with my clients is either you're a direct owner or an indirect owner of a pass-through entity, and that pass-through entity is either a direct or indirect shareholder of a PFIC. And so the important thing about Form 8621 is that there are many different filing requirements depending on what types of PFIC you're either a direct or indirect shareholder in. But the important thing that is, in addition to being required to file form 8621 to report these investments, you may even be required to report additional taxable income as a result of these investments. So it is very important to consult with your tax advisor if you think you might be a shareholder in one of these companies.
Speaker 2:So, alex, what happens if I fail to file any of these forms? All right, so if you fail to file any of these forms, Alright.
Speaker 3:so if you fail to file any of the required forms, you're going to be subject to significant penalties. These penalties might be as high as tens of thousands of dollars per violation. It can really stack up if you fail to disclose multiple of these different types of accounts or investments. So if you have a bunch of foreign bank accounts, foreign partnerships and foreign corporations you don't disclose all of those things, it's very easy for your fines to trickle up to as high as in the six figures. It's very important to get out ahead of it and to be proactive and to kind of disclose all these things to the government to make sure that they don't find these things and assess you with all these penalties.
Speaker 2:Now, what final advice would you give to someone who thinks that they have activity in a foreign country?
Speaker 3:I would say definitely speak to a tax advisor, and then, when you do, it's always important to make sure that you over-disclose things to your accountant so that they can determine what types of implications there may be in relation to these things.
Speaker 3:Another advice I would say is a lot of times you may not own an interest in these partnerships or corporations directly, but you might own a domestic partnership that has an interest in these types of entities, and because you own a flow-through partnership, all that information and all those filing obligations will flow down to you.
Speaker 3:So you will be required to file those forms, even if you don't own them directly, if you own them through a lot of these investment partnerships, and so you would know if one of your partnerships is invested in this, because typically that information would be included in your Schedule K-1 footnotes, and so that's why it's important to kind of get ahead of this, bring it up to your tax advisor so that they can look out and make sure we have all the information that we need to file these things. And then, lastly, we give out a tax organizer to all of our clients every year and then so this organizer has questions that will kind of lead our clients to help them identify these things at the forefront, so that we can really make sure we're addressing all these foreign issues.
Speaker 2:Well, thank you so much for these helpful insights today. Alex, have a fantastic rest of your day.
Speaker 3:All right, thank you you as well, sophia. Have a fantastic rest of your day. All right, thank you you as well.
Speaker 1:Sophia, thanks for listening to the Knowing what Counts podcast. Ready to optimize your wealth and protect your future, visit thempgroupscpacom or call 413-739-1800 to connect with our team of experts. Remember, success is about knowing what counts.