Reporting Foreign Investments and Activities

By Leibowicz, Barry | The CPA Journal, July 2013 | Go to article overview

Reporting Foreign Investments and Activities


Leibowicz, Barry, The CPA Journal


Requirements and Penalties for Foreign and U.S. Taxpayers

Cross-border business and investment activities give rise to a host of reporting and filing obligations under both the Internal Revenue Code (IRC) and various other statutes, such as the Bank Secrecy Act of 1970 (BSA). Once CPAs are aware of an individual's cross-border activities, they must ensure compliance with all reporting obligations. Failure to properly report such activities can result in draconian consequences, far more severe than the penalties that are ordinarily assessed for unfiled or late tax returns.

For example, the opportunity to make an IRC section 871(d) election-to treat real estate activities in the United States as effectively connected with a trade or business in the country and, therefore, taxable on a net rather than gross basis-is jeopardized if an accurate (IRC sections 874[a] and 882[c][2]) and timely (Treasury Regulations sections 1.874-1 [b][l] and 1.882-4[a][3][i]) return is not filed. (The Tax Court held that the timeliness requirement of the Treasury Regulations is invalid because it is inconsistent with the plain meaning of the statute, which requires only that the return be filed in the "manner" required by the statue; however, this decision was overturned on appeal [Swallows Holding Ltd. v. Comm'r, 515 F.3d 162 (3d Cir. 2008), rev'g 126 T.C. 96 (2006)]).

A willful failure to file a Foreign Bank Account Report (FBAR), required under the BSA, can result in penalties as high as 50% of the highest balance in the foreign account for each year (31 USC section 5321[a][5][C] and [D]). In addition, a willful failure to file can result in criminal prosecution for both taxpayer and advisor (31 USC section 5322[a]). Given the breadth and diversity possible in cross-border transactions, some might require the filing of forms not specifically discussed in this article. As such, this article provides guidance for the most critical forms that CPAs should be aware of in order to ensure compliance with the reporting requirements. It is also important to understand that any relevant, applicable treaty provisions between the United States and a foreign person's residence may supersede the default provisions of U.S. law related to reporting requirements.

Foreign Taxpayers' Filing Obligations

Foreign persons are subject to tax filing and payment responsibilities in the United States if they are engaged in a trade or business in the country (IRC section 871 [b]) or if they receive specific types of income from a U.S. source (IRC sections 871 [a] and 881 [a]). For example, the receipt of fixed, determinable, annual, or periodical (FDAP) income from a U.S. source by a foreign person subjects that individual to U.S. tax filing obligations.

Foreign persons must file a U.S. tax return on Form 1040NR, U.S. Nonresident Alien Income Tax Return, if they are-

* nonresident aliens who engaged in the conduct of a U.S. trade or business at any time during the taxable year, even if they had no U.S. source income and all income was exempt from tax;

* nonresident aliens who were not engaged in a U.S. trade or business during the year and had U.S. source income subject to tax, and not all of the tax owed was withheld from that income;

* the executors or personal representatives of a deceased nonresident alien who would have been required to file; or

* representing an estate or trust that is required to file Form 1040NR. (See the instructions for Form 1040NR, p. 3.)

Foreign persons who rely upon an income tax treaty to reduce or modify their U.S. tax obligations must file a separate treaty-based return position disclosure form for each position taken (IRC section 6114[a]); the disclosure is made on Form 8833, Treaty-Based Return Position Disclosure under Section 6114 or 7701(b). (For a discussion of when and how to file Form 8833, see the 1RS article, "Claiming Benefits," http://www.irs.gov/Individuals/ International-Taxpayers/Claiming-TaxTreaty-Benefits. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Reporting Foreign Investments and Activities
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.