Tax Reform and Other Tax Laws Relevant to Asian Americans

By Tania Sebastian and Susan (Choi) Luu

FBAR…OVDP…FATCA…You won’t find the translation for these words in your dictionary!

But, if you answer yes to any of the following questions, you need to know what these acronyms stand for:

1. Did you recently immigrate to the U.S.?
2. Do you have a green card?
3. Do you travel between the U.S. and Asia regularly?
4. Do you or your family members own any foreign financial assets (e.g. bank accounts, stocks, investment accounts)?
5. Do you own any foreign entities (trusts, partnerships, corporations, etc.) either directly or indirectly?

Not knowing the U.S. tax consequences resulting from answering “yes” to any of the above questions may have a significant impact on you, even if many of your assets are located outside the United States. We’ve provided a brief overview on these terms and related comments on the 2017 Tax Reform.

FinCEN Form 114, “Report of Foreign Bank and Financial Accounts” (“FBAR”)

The Bank Secrecy Act of 1970 made it law that U.S. persons¹ must file an FBAR annually with the Financial Crimes Enforcement Network (“FinCEN”) bureau of the U.S. Department of Treasury if the aggregate value of their foreign financial accounts exceeds $10,000 on any day during the year. The law was initially implemented to combat money laundering but evolved as a tool for the government to also monitor other criminal activities such as drug and other trafficking, terrorist financing and, most recently, offshore tax evasion. Failure to timely file an FBAR can result in monetary and, even, criminal penalties.

Offshore Voluntary Disclosure Program (“OVDP”)

OVDP is a formal program that allows taxpayers with undisclosed offshore income and/or assets to voluntarily report their previously omitted income/assets. In return, the taxpayers would be assessed reduced penalties so that instead of all the various penalties that would otherwise apply, such as the FBAR penalty, the taxpayer would be assessed a flat “OVDP penalty” based on a percentage of the highest account balance over the covered tax years. OVDP has been available from 2009, in successive versions, with the current version implemented in 2014. However, the IRS recently announced that OVDP will end on September 28 of this year. There are other procedures available for taxpayers to voluntarily disclose unreported offshore income/assets, such as the IRS Streamline Offshore Procedures, Delinquent FBAR Submission Procedures and the Delinquent International Information Return Submission Procedures; however, it is unclear how much longer these voluntary disclosure procedures will be available.

Foreign Account Tax Compliance Act (“FATCA”)

FATCA is a major piece of legislation and it is the biggest, newest weapon that the IRS has in its war against offshore tax evasion. Its impact is far reaching as it requires every foreign financial institution (“FFI”) in the world that does business with the U.S. to report its U.S. account holders (as well as requiring non-financial foreign entities (“NFFEs”) that receive U.S. payments to report certain U.S. owners). As with the FBAR requirements, there is also a self-reporting requirement placed on U.S. taxpayers² who own foreign financial assets with an aggregate value exceeding $50,000 (or higher threshold, depending on the taxpayer’s marital status and whether they live in the U.S.). These individuals must report certain information about those assets on Form 8938 that is attached to their annual income tax return. Also similar to FBARs, failure to report foreign financial assets on Form 8938 can result in monetary and, possibly, criminal penalties. However, Form 8938 has additional penalties, including keeping the statute of limitations for the tax year to remain open for all or part of an individual’s income tax return until three years after the date in which a complete Form 8938 is filed, meaning the IRS can audit a tax return for any year that the statute of limitation is not closed.

In addition to the self-reporting function of the FBAR and Form 8938, the U.S. government has also sought cooperation from other countries to implement FATCA by entering into Intergovernmental Agreements (“IGAs”) with countries. Many Asian countries including, but not limited to Hong Kong, India, Japan, Singapore and South Korea³ have signed an IGA to cooperate with FATCA by allowing the identification and reporting of U.S. persons either directly or through the cooperating government’s tax authority.

2017 Tax Reform

The provisions of the 2017 Tax Reform are extremely complex, certainly in the international tax area. There are also areas of uncertainty in the law and the potential for changes in the rules, some of which may be retroactive. Given the complexity and potentially significant tax implications, it is strongly recommended that taxpayers with ownership interest of foreign entities perform an analysis not only to see if they are subject to the Mandatory Deemed Repatriation Transition tax and the new Global Intangible Low-Taxed Income (“GILTI”), but also if they are a good candidate for restructuring in order to take advantage of the new Foreign Derived Intangible Income (“FDII”) deduction and the other benefits available to C-corps that are not necessarily available to individual shareholders.

Conclusion

With the demise of bank secrecy in Switzerland and other parts of Europe, the government is increasingly turning more of its attention to financial institutions in Asia. Equipped with the tools that it has to obtain information, the IRS has the will, resources and the information to find non-compliant taxpayers. Immigrants new to the U.S. often do not have sufficient information with regards to their U.S. tax filing and information return obligations before they move to the U.S. or obtain “green cards.” Unfortunately, while ignorance of the laws may be considered to determine willfulness in the context of criminal intent, it generally is not accepted as reasonable cause to eliminate civil penalties. With the published ending of the OVDP, there is a strong possibility that this may result in many U.S. immigrants finding out too late. Time is indeed running out, but there is still some time. With the advice of a professional experienced in these complex rules and advising families with these issues, taxpayers at risk should consider their options and evaluate whether participation in one of the various IRS voluntary disclosure procedures is appropriate for their circumstances.

 

Authors

Tania S. Sebastian is a counsel at Troutman Sanders LLP and can be reached at tania.sebastian@troutman.com or 703-734-4361.

Susan (Choi) Luu is a director at Andersen Tax LLC and can be reached at susan.choi@AndersenTax.com or 571-382-0047.

 

 

¹ Filers for FBAR purposes include U.S. citizens and U.S. residents, including entities (e.g. corporations, partnerships, trusts or limited liability companies) created, organized, or formed under the laws of the United States, any state, the District of Columbia, the Territories, and Insular Possessions of the United States or the Indian Tribes.

² Filers for Form 8938 include U.S. citizens, U.S. resident aliens, nonresident aliens who elect to be treated as resident aliens for purposes of filing a joint income tax return, nonresident aliens who are bona fide residents of American Samoa or Puerto Rico and certain domestic entities, such as corporations, partnerships or trusts formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.

³ China has an Agreement in Substance, which means that they are treated as having an IGA in force, and is in the process of signing an IGA.