Over recent years, the IRS has developed new reporting requirements for any entity or individual with offshore investments in order to limit tax avoidance from investments in foreign lands. These requirements include, but are not limited to, financial interest in or signature authority over foreign accounts or banks, ownership of foreign corporations or partnerships, transfers among foreign entities, or charitable activities in foreign countries. The article within will help you to understand the implications of any foreign transactions you may have or were considering and identify areas you might want to discuss with your CPA to ensure proper disclosure.
Speaking the Language
In recent years, the IRS has developed and issued new reporting requirements for any and all U.S. based citizens, companies, or nonprofit organizations. This was in direct correspondence to the issues regarding “hiding” foreign investments and holdings to avoid tax burdens. While these reporting requirements rarely generate additional tax consequences, the forms themselves can be confusing and the penalties for not filing applicable forms can be substantial. Upon reaching certain specific value amounts for investments or upon owning a specific percentage of foreign companies, any U.S. resident (company or individual) is required to file additional forms. These requirements also apply to nonprofit entities.
Update Your Passport
If during any given year, your organization has financial interest or simply has signature authority for a foreign bank or financial account, you may be subject to additional reporting requirements. Specifically, if at any time you have either financial interest or authority for an account that had more than $10,000 in U.S. dollars at ANY time during the calendar year, you must file what is known as a Report of Foreign Bank and Financial Accounts (FBAR). The exchange rate for the applicable country of origin for the account should be used to convert the currency into U.S. dollars as of December 31 of the year you are filing for. The FBAR reports must then be filed electronically each calendar year by June 30th.
Buy your Ticket
In addition to the FBAR, anytime that a nonprofit company owns above a certain threshold, usually around 10%, of any nondomestic corporation, there are additional reporting requirements on Form 5471. Additionally, if your entity received distributions from or paid contributions of more than $100,000 to any company, your entity may be required to file Forms 8621, 926, 8865; however, simply meeting these thresholds does not mean that reporting is required, as some of the reporting requirements also assess the type of income earned by the entity. For example, if a company received distributions of more than $100,000 from a foreign entity, but did not generate any unrelated business taxable income (UBTI) then the filing of Form 8621 may not be required.
As of 2008, a public charity filing Form 990 that has any activities located outside of the United States could be subject to filing an additional schedule to report such activities. Activities such as grant making, fundraising, business (including investments), and program services outside of the U.S. will generally require reporting additional information on Schedule F.
Come on home
The information above is but a small portion of all of the information needed to ensure that your entity is filing the proper forms. The international taxation rules for all U.S. persons, including nonprofits, are very confusing and voluminous, and the penalties for not filing required forms can be substantial. Please feel free to contact your L&B professional at (858) 558-9200 if you feel you may be subject to any foreign reporting requirements and would like guidance or help determining if you need to take any action.