Foreign Financial Reporting

Question 1

What are BSA & FATCA

Answer 1

1. BSA - Bank Secrecy Act - Reporting Requirements on Foreign Financial Accounts
2. FATCA - Foreign Account Tax Compliance Act - mandates reporting foreign financial assets.

Question 2

What are CTA & BOI?

Answer 2

1. CTA = Corporate Transparency Act - which requires beneficial owner information to be reported for foreign companies (not domestic) to FinCEN.
2. BOI = Beneficial Owner Information

Question 3

True or False

A person who holds a foreign (non-US) financial account may have a reporting obligation, when the account produces no taxable income, and when the person does not have an individual tax filing requirement.

Answer 3

True

Question 4

What is an FBAR

Answer 4

Form 114, Report of Foreign and Financial Assets - It is not filed with the IRS, or with a tax return. They are filed directly with FinCEN, The Financial Crimes Enforcement Network.

Signature authority will prompt the FBAR reporting.

Question 5

Are nonresident aliens obligated to file an FBAR.

Answer 5

No - But they may be obligated to file an FBAR if:
a. choose to be treated as a resident for tax purposes or
b. elect to file a tax return with a US citizen or resident

Question 6

How long should the bank records regarding the foreign accounts on an FBAR be kept by a taxpayer?

Answer 6

A minimum of 5 years from the due date of the report, which is the year following the calendar year beng reported.
So reporting on 2024, due date of FBAR is in 2025, so keep records through 2030.

Question 7

What is the IRS responsibity regarding FBAR reporting.

Answer 7

It does not process an FBAR but enforces FBAR reporting rules.

Question 8

When is FBAR reporting required?

Answer 8

There is a question on Form 1040, Sch B, Part III and requires FBAR reporting if:

a. a person had a financial interest in or signature authority over at least one foreign financial account located outside the United States AND
b. the aggegate value of all foreign financial accounts exceeded $10000 at anytime during the calendar reporting year.

including having POA or custodianship

Question 9

What are the kinds of foreign financial accounts included for FBAR reporting?

Answer 9

Bank accounts: Savings, checking, demand deposits, certificates of deposit (CDs), and time deposits.

Securities/Investment accounts: Brokerage accounts, stock accounts, securities derivatives accounts, or other accounts holding financial instruments.

Commodity futures or options accounts.

Insurance policies with a cash value: Such as whole life insurance or annuity contracts with a cash value.

Mutual funds or similar pooled funds: Including foreign hedge funds and private equity funds.

Foreign pension plans or retirement accounts.

Trust accounts (where a U.S. person has a financial interest).

My note: does not say Partnership Interests??

Question 10

What is the filing due date for an FBAR?

Answer 10

April 15 with an automatic extention to Oct 15, (no extention form needs to be filed).

Question 11

What are the age or filing exceptions for FBAR reporting.

Answer 11

There are no exceptions for age or filing status, if the account is > $10000 at any time during the year it is required for all human tps as well as businesses (corps, partnerships etc)

Question 12

What are the FBAR requirements for Spouses and Jointly Owned accounts?

Answer 12

A spouse is not required to file a separate FBAR if all of the following conditions are met:
1. All of the accounts the non-filing spouse is required to report are jointly ownedwith the filing spouse.
2. The filing spouse reports all the jointly owned accounts on a timely-filed FBAR.
3. Both spouses complete and sign FinCEN Form 114a (Record of Authorization to Electronically File FBARs), which authorizes the filing spouse to file on the non-filing spouse’s behalf. This form is retained by the couple and not sent to FinCEN.

Note: The spouses’ income tax filing status (e.g., Married Filing Jointly or Separately) does not affect FBAR requirements.

Question 13

What is the tax treatment of a non-willful failure to file an FBAR?

Answer 13

The penalty for non-willful failure to file an FBAR is one of the harshest, up to $10,000 per return, and adj for inflation the 2024 penalty is $16,117. This is for one missing FBAR, it’s per report, not per financial account.

A willful failure penalty, for 2024 (adj for inflation), is $166,166, and it’s per year, so if the tp willfully fails to file a required FBAR for six years, (the period the IRS can go back) the penalty could be over $600,000.

These are civil penalties, the criminal penalties are worse and include jail time.

Question 14

When will the IRS NOT impose a penalty for the failure to file a delniquent FBAR?

Answer 14

If the tp properly reports on the Federal income tax return, and paid all the tax on, the income from the foreign financial accounts reported on the deliquent FBAR if the tp has not already been contacted about an audit regarding the deliquent returns, or the IRS has not requested the deliquent returns.

Question 15

What is a foreign financial account for FBAR purposes?

Answer 15

It’s any financial account physically located outside the USA. For example, a Wells Fargo savings account located in France is a foreign financial account, but a savings account with a bank based in France, with the savings account located in Texas, is not a foreign financial account.

Question 16

Is a safe-deposit box at a foreign financial institution considered a foreign financial account?

Answer 16

Usually NO - However, if gold, bullion, or foreign currency is held inside a foreign financial institution, it is subject to FBAR reporting.

Specified foreign financial assets do not include gold, bullion, or currency held directly by an individual. (So if a US Citizen has a house in Mexico, and he stores gold bars in his home wall safe - he does not need to file an FBAR).

Question 17

What is Form 3520 - Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts?

Answer 17

Form 3520 is an informational return (it does not calculate tax liability) that the IRS uses to track money and assets flowing between U.S. persons and foreign trusts or foreign individuals/entities. The primary purpose is transparency and preventing tax evasion through offshore structures.

Question 18

What is required to be reported on Form 3520,

Answer 18

1. Receipt of Large Foreign Gifts or Bequests
   A U.S. person must file if they receive certain large gifts or bequests (inheritances) from foreign persons.
2. Transactions with Foreign Trusts
   A U.S. person must file Form 3520 if they are involved in a transaction with a foreign trust, including:
   a. Creating a foreign trust.
   b. Transferring money or property (directly or indirectly) to a foreign trust.
   c. Receiving a distribution (money, property, or a loan/uncompensated use of trust property) from a foreign trust
3. . Ownership of a Foreign Trust
   A U.S. person must file if they are treated as the U.S. owner (grantor) of a foreign trust under the grantor trust rules (IRC sections 671-679). This means the U.S. person is taxed on the trust’s income, regardless of whether it is distributed

Question 19

Jane is a US citizen with relatives in France. Her uncle in France sent her $60,000 as a birthday gift and her Canadian brother sent her $50,000. What is Jane’s filing requirement?

Answer 19

She must file Form 3520 because the gifts totalled over $100,000 from related parties in a single tax year. She must report, but it is not taxable.
The threshold for gifts/bequests received from a nonresident alien individual or a foreign estate, remains at $100,000 (with cost-of-living adjustments possible for the future)

uncle & brother related parties?

Question 20

What triggers the requirement to file Form 3520?

Answer 20

A U.S. person (including individuals, partnerships, corporations, estates, and domestic trusts) must file Form 3520 if they meet any of the following threshold requirements during the tax year:

1. Gifts from Foreign Individuals or Estates The aggregate value of gifts or bequests received from a nonresident alien individual or a foreign estate exceeds $100,000.
2. Gifts from Foreign Corporations/ Partnerships - The aggregate value of gifts received from a foreign corporation or foreign partnership exceeds a certain threshold (this amount is adjusted annually for inflation and is significantly lower than the individual/estate threshold).
3. 2024 $19570 if from foreign partnership or corporation
4. Transfers to Foreign Trust - Any direct or indirect transfer of property to a foreign trust.
5. Receipts from Foreign Trust - Any direct or indirect distribution from a foreign trust (including a loan).

Note: Foreign Trust Owner - The U.S. person is treated as the owner of any portion of a foreign trust under the grantor trust rules.

Question 21

What is he dollar threshold for filing IRS Form 3520 in the 2024 tax year regarding gifts received from foreign corporations or foreign partnerships?

Answer 21

The dollar threshold for filing IRS Form 3520 in the 2024 tax year regarding gifts received from foreign corporations or foreign partnerships is: $19,570.

A U.S. person must file Form 3520, Part IV, if the aggregate amount of gifts received from all foreign corporations and foreign partnerships during the taxable year exceeds this amount.

Question 22

Explain what Form 8938 - Statement of Specified Foreign Financial Assets, is and it’s purpose.

Answer 22

Form 8938, - Statement of Specified Foreign Financial Assets, is an informational return implemented under the Foreign Account Tax Compliance Act (FATCA).

Purpose
The purpose of Form 8938 is to provide the IRS with transparency regarding certain foreign financial assets held by U.S. taxpayers. The IRS uses this information to ensure that all income generated by those assets (e.g., interest, dividends, capital gains) is properly reported on the taxpayer’s income tax return.

Key Difference from FBAR
Form 8938 is filed with the IRS and is attached to the annual income tax return (Form 1040, etc.). It reports a broader category of assets (Specified Foreign Financial Assets) and has significantly higher filing thresholds.

FBAR (Form 114) is filed separately with FinCEN and only reports foreign financial accounts (like bank or brokerage accounts), with a much lower threshold of $10,000.

A taxpayer may be required to file both forms.,

Question 23

What kinds of Foreign Financial Assets are reported on Form 8938?

Answer 23

FFAs include, but are not limited to:
a. Foreign bank and brokerage accounts.
b. Foreign stock or securities not held in a financial account.
c. Interests in a foreign entity (like a foreign partnership or corporation).
d. Foreign non-cash value life insurance or annuity contracts.

Question 24

What is the filing threshold for Form 8938 - Statement of Specified Foreign Financial Assets

Answer 24

Form 8938 required if: Value on Last Day of Year / Max Value Anytime in the Year

U.S. Resident (S/MFS) Over $50,000 Last Day of Year / Over $75,000 Anytime in the Year
U.S. Resident (MFJ) Over $100,000 Last Day of Year / Over $150,000 Anytime in the Year

Taxpayer Living Abroad (S/MFS) Over $200,000 Last Day of Year / Over $300,000 Anytime in the Year
Taxpayer Living Abroad (MFJ) Over $400,000 Last Day of Year / Over $600,000 Anytime in the Year

Question 25

If a tp does not have a US income tax filing requirement for the year are they still required to file Form 8938 - Statement of Specified Foreign Financial Assets - ?

Answer 25

No - Not even if if the FMV of their Specified Foreign Financial Assets is greater than the thresholds. (However they still must comply with FBAR rules)

Question 26

What is the exception to reporting $100,000 received from a foreign source that normally require reporting on Form 3520?

Answer 26

When they pay for medical expense or education and the payment is made directly to the institution providing the medicine or education.

Question 27

What is the penalty for not filing or being late to file Form 3520 - Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

Answer 27

5% of the amount of the foreign gift or bequest for each month for which the failure to report continues, up to 25% (must report when actively or constructively received) No penalty if failure was due to reasonable cause and not willful neglect.

Question 28

How is Form 8938 - Statement of Specified Foreign Financial Assets handled when filing form 1040. Is it attached to the 1040 or filed separately?

Answer 28

Form 8938 - Statement of Specified Foreign Financial Assets - Must be attached to the Form 1040 (and is required in addition to FBAR reporting).

Question 29

What is the penalty for failure to File Form 8938 - Statement of Specified Foreign Financial Assets?

Answer 29

If not attached to a timely filed return (including extentions the tp may get a $10,000 penalty. If contacted by the IRS about the missing 8938, the tp has 90 days to file the form. If the tp does not respond, then there is an additional $10,000 fine for each month the Form is not filed, up to five months for a max fine of $60,000.

Question 30

List items not considered to be "Specified Foreign Financial Assets" (unless held by a foreign corporation, trust, or estate) meaning held by an individual.

Answer 30

The following are not considered to be "Specified Foreign Financial Assets" when held by an individual human: a. Foreign Real Estate: Direct ownership of foreign real estate (e.g., a **personal residence or rental property held in your name**). b. Physical Assets: **Direct holdings of physical assets,** such as: 1. Foreign Currency (cash held directly). 2. Precious Metals (e.g., gold or silver bullion held directly). 3. Personal Property (e.g., art, jewelry, or collectibles). c. U.S.-Maintained Accounts: Financial accounts maintained by a U.S. payer, such as: 1. Accounts held at a U.S. financial institution (even if the account holds foreign stocks or securities). 2. **Accounts at the foreign branch of a U.S. financial institution.** 3. **Accounts at the U.S. branch of a foreign financial institution.** d. **Foreign Social Security:** Payments or the rights to receive the foreign equivalent of U.S. Social Security, social insurance benefits, or a similar foreign government program.

Question 31

What is Is Form 5471 - Information Return of US Persons With Respect To Certain Foreign Corporations a tax return, or an information return and who must file it?

Answer 31

* It is an information return, (no tax due) and is used to **report ownership of a foreign corporation that is > 10%.** Potentially the following people may need to file Form 5471 - Information Return of US Persons With Respect To Certain Foreign Corporations: *US citizens and Resident Aliens *US Domestic Corporations *US Domestic Partnerships *US Domestic Trusts

Question 32

What is the penalty for not filing Form 5471- Information Return of US Persons With Respect To Certain Foreign Corporations?

Answer 32

If not attached to a timely filed return (including extentions) the tp may get a **$10,000 penalty**. If contacted by the IRS about the missing 5471, the tp has 90 days to file the form. If the tp does not respond, then there is an additional $10,000 fine for each month the Form is not filed, **up to five months for a max fine of $60,000.**

Question 33

If a tp does not need to file a tax return because their income is below the filing threshhold, must the tp file file Form 5471 - Information Return of US Persons With Respect To Certain Foreign Corporations?

Answer 33

The Form 5471 should be filed along with the tp's tax return. If the tp is not required to file a tax return, the Form 5471 will still need to be filed if the tp meets the filing threshold. (> 10% ownership in a foreign corporation), If it is not filed applied the penalty applies.

Question 34

Regarding FBAR reporting requirements, the IRS issued guidance on the penalties for the failure to file the FBAR that caps the maximum penalty percentage. In most cases the total penalty amount for all years under examination will be limited to ( ? ) **% of the highest aggregate balance of all unreported foreign financial accounts during the years under investigation.** a. 10% b. 25% c. 50% d. 75%

Answer 34

C - 50%

Question 35

Sue is unmarried and lives in Iowa. She is a US citizen and has ownership of specified foreign financial assets which she inherited when her Italian grandmother died. Which of the following assets, all of which are located in Italy, may trigger the filing of Form 8938? a. a personal residence b. a profitable rental property c. directly held precious metals d. a partnership interest in an Italian partnership

Answer 35

D - a partnership interest in an Italian partnership can trigger the filing of a Form 8938 if the partnership interest is not held in a US based financial account.

Question 36

Must the Form 3520 - Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, be attached to the Form 1040?

Answer 36

NO - Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, **is a separate filing from your Form 1040,** U.S. Individual Income Tax Return. It **must be mailed to a specific IRS address, and cannot be attached to your Form 1040.** Currently, it can only be filed on paper, not electronically.

Question 37

What is the date the Form 3520 is due?

Answer 37

General Due Date: The 15th day of the 4th month following the end of your tax year. For most individual taxpayers (calendar year), this is **April 15, 2025.** Extension: If you are granted an **extension of time to file your Form 1040 (by filing Form 4868), the due date for Form 3520 is also extended** to the 15th day of the 10th month following the end of your tax year, which is typically October 15, 2025.

Question 38

Collette is an unmarried U.S. citizen who lives and works in the U.S. She owns a vacation condo in Mexico and visits the condo frequently, and sometimes will stay for several months. She does not live or work in Mexico, but in order to facilitate her trips abroad, she opened several bank accounts in Mexico. At the end of the year, she had the following funds held in three separate Mexican bank accounts: Santander Bank Mexico: $8,000 Citibanamex: $19,000 Scotiabank Mexico: $35,000 All amounts above are converted to U.S. dollars. What are Collette’s federal tax filing requirements for these funds? A. She must file an FBAR. B. None. Funds held in Mexican bank accounts are not taxable by the U.S. government. C. She must file both an FBAR and Form 8938. D. She must file Form 8938.

Answer 38

C: Collette will need to file both an FBAR and Form 8938. Note: The filing threshold for the FBAR is $10,000 in any foreign bank account(s). **The filing threshold for Form 8938 is $50,000 for U.S. Citizens who do NOT have a foreign tax home.** Since Collette lives in the U.S. and her tax home is also in the U.S. then she must file both forms based on the amounts she has deposited in the foreign banks. The filing threshold is higher for those who live and work abroad. You should be familiar with the distinctions between FBAR and Form 8938 requirements for the exam (it is on the EA exam test specifications). To see a table comparison of FBAR and Form 8938 requirements, reference the dedicated IRS detail page.

Question 39

Lorne and Donatella are married and live in the U.S. all year long. They jointly co-own a foreign investment account valued at $60,000. This is a "specified foreign financial asset". They file separate income tax returns (MFS). Lorne earned $95,000 in wages for the year. Donatella had $34,000 in royalty income. They both have a filing requirement, so both will file individual separate returns. Is either spouse required to file Form 8938, Statement of Foreign Financial Assets? A. They are both required to file Form 8938, unless they file jointly. B. Neither spouse is required to file Form 8938. C. Yes, they are both required to file Form 8938. D. Only Lorne is required to file Form 8938

Answer 39

B: Neither spouse has to file Form 8938. **Each owns one-half of the value of the asset ($30,000 each).** This amount must be used to determine the total value of specified foreign financial assets that each owns. They **both reside in the United States, so neither spouse meets the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.**

Question 40

Which of the following foreign financial interests is not required to be reported on Schedule B, and will not trigger possible FBAR reporting? A. Signature authority over a bank account in a foreign country. B. Ownership of a foreign annuity policy with a cash value. C. Being the beneficiary of a foreign term life insurance policy with no cash value. D. Direct ownership of a foreign mutual fund.

Answer 40

Correct Answer Explanation for C: A taxpayer is not required to report if they are the beneficiary of a foreign term life insurance policy with no cash value. A taxpayer is required to file Schedule B if any of the following applies: You had over $1,500 of taxable interest or ordinary dividends. You received interest from a seller-financed mortgage and the buyer used the property as a personal residence. You have accrued interest from a bond. You are reporting original issue discount (OID) of less than the amount shown on Form 1099-OID. You are reporting interest income of less than the amount shown on a Form 1099 due to amortizable bond premium. You are claiming the exclusion of interest from series EE or I U.S. savings bonds issued after 1989. You received interest or ordinary dividends as a nominee. You had a financial interest in, or signature authority over, a financial account in a foreign country or you received a distribution from, or were a grantor of, or transferor to, a foreign trust.

Question 41

Lenny and Kristy, both age 65, are U.S. citizens but lived abroad for the entire tax year in Greece. They have not returned to the US in five years. They will file a joint income tax return. The total value of their combined specified foreign financial assets is $150,000, which is all cash in their Greek bank account. The account balance has never exceeded $150,000. What foreign reporting requirements do they have? A. The FBAR only. B. They must file Form 8938 and the FBAR. C. They must file Form 8938, but they do not have to file an FBAR. D. They do not have any reporting requirements.

Answer 41

Correct Answer Explanation for A: They only have to file the FBAR. Lenny and Kristy do not have to file Form 8938. Since they live overseas all year, their reporting threshold for foreign financial assets is higher than taxpayers who reside in the United States. **The reporting threshold for married taxpayers that live overseas is (1) more than $400,000 on the last day of the tax year or (2) more than $600,000 at any time during the tax year**. Since their foreign account holds only $150,000, they do not need to file a Form 8938.

Question 43

Lorne and Donatella are married and live in the U.S. all year long. They jointly co-own a foreign investment account valued at $60,000. This is a "specified foreign financial asset". They file separate income tax returns (MFS). Lorne earned $95,000 in wages for the year. Donatella had $34,000 in royalty income. They both have a filing requirement, so both will file individual separate returns. Is either spouse required to file Form 8938, Statement of Foreign Financial Assets? A. Yes, they are both required to file Form 8938. B. Only Lorne is required to file Form 8938. C. Neither spouse is required to file Form 8938. D. They are both required to file Form 8938, unless they file jointly.

Answer 43

12. Question ID: 94850273 (Topic: International Information Reporting) Lorne and Donatella are married and live in the U.S. all year long. They jointly co-own a foreign investment account valued at $60,000. This is a "specified foreign financial asset". They file separate income tax returns (MFS). Lorne earned $95,000 in wages for the year. Donatella had $34,000 in royalty income. They both have a filing requirement, so both will file individual separate returns. Is either spouse required to file Form 8938, Statement of Foreign Financial Assets? A. Yes, they are both required to file Form 8938. B. Only Lorne is required to file Form 8938. C. Neither spouse is required to file Form 8938. correct D. They are both required to file Form 8938, unless they file jointly. wrong Study Unit 17: Foreign Financial Reporting covers the information for this question. This question is answered correctly on the first attempt by 20% of students. Correct Answer Explanation for C: Neither spouse has to file Form 8938. Each owns one-half of the value of the asset ($30,000 each). This amount must be used to determine the total value of specified foreign financial assets that each owns. They both reside in the United States, so neither spouse meets the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. (Example from the Form 8938 Instructions). Note that a different reporting threshold exists for taxpayers who live abroad.