Foreign Accounts Not Reported

[PPJCPA]

A new client has come to me because the taxpayer is from Australia (dual citizen) and his wife had an Australian CD account with a $20,000 balance in it for 2015 and 2016. In 2014 the account was less than $10,000 USD. The interest income from the CD was not reported on 2014, 2015 and 2016 tax returns.

I believe the best way to handle this is by following the Streamlined Domestic Offshore Procedures. However if I am incorrect with this assessment, I am open to other options. I have read through the instructions but I have the following question:

- Taxpayer and Spouse both have an Australian Superannuation Fund over the $10,000 USD. I have read that this should be reported on Form FinCEN 114. I also read that these funds have to be reported on Form 3520 because although the Superannuation Fund are in many ways the equivalent of qualified retirement plans here in the US, these funds are organized as trusts. This means that they are subject to the reporting requirements of IRC Section 6048. So for example IRC Section 6048 provides that a responsible party must notify the service each time that a US person creates a foreign trust, transfers money to a foreign trust, or when a US person dies if s/he owned a portion of the foreign trust.

- Question: If my clients didn't contribute personally to these funds but were contributed by their employer, are they required to report? Taxpayer is Australian with dual citizenship and moved to the US in 2010. The spouse (US Citizen) worked in Australia for three years.

- Superannuation Fund (continued) I further read, "Under IRC Section 6048(b), a US owner of a foreign trust is required to file Form 3520-A every year if not filed by the trustee.

- Question: Does anyone have experience with this? If a US person works in Australia and this fund is created, would the trustee of the fund file this return in the US?

[brobey]

Streamlined Domestic Offshore Procedure would be the way to go in this case as it appears that they were ignorant of the requirements.

Make sure that they have lived outside the US for at least 330 days in one of the last 3 tax years. If they don't meet that requirement they may still get the penalty reduced to a 5% penalty by requesting a waiver.

Make sure that you file the appropriate FBAR/FINCEN114 paperwork for each year and by April 15th of this year if the money is still in Australia. (I would get it out of there as soon as practical)

Make sure you file original returns for the last 3 years.

Now the Superannuation fund has an opportunity to be non-taxable on the US return. There is a way that a tax attorney can review the tax treaty and render a written tax position. (they will charge for this)

I would verify that they did not contribute to the fund through a payroll deduction. Not contributing would be unusual and changes how the trust money is reported.

You next have to figure out if it is a foreign grantor trust or Employee benefits trust. If employee benefits trust it must be reported on the 1040 and ownership needs to be reported on Form 8938 if the threshold requirements are met
If they make > 120K per year they make have to pay tax on the income.

The Superannuation is not qualifying income for the foreign earned income exclusion - however you can use foreign tax credits to offset the us taxes on any income.

Next issue you have is do they control where the money is invested? Can the taxpayer direct what investments are made? (even if they don't but still have the ability then they have control)

If they make the decisions then this can cause the superannuation to be a foreign grantor trust (or a self managed superannuation fund (SMSF))

Reporting the trust on the FBAR again I would rely on the tax attorneys opinion. It is a gray area and since the taxpayer wont own 50% of the assets a written opinion as to why you took the position you did; should be on any written tax position.

I hope this helps a little. It is a difficult area.
UNDER ANY CIRCUMSTANCE - always file an explanation of the positions you take when preparing the tax return (8275-R).

DISCLAIMER: This does not constitute legal or accounting advice. The contents of this message are my opinion and all content should be thoroughly researched and legal counsel consulted in any matter stated above.

[PPJCPA]

Streamlined Domestic Offshore Procedure would be the way to go in this case as it appears that they were ignorant of the requirements.

Make sure that they have lived outside the US for at least 330 days in one of the last 3 tax years. If they don't meet that requirement they may still get the penalty reduced to a 5% penalty by requesting a waiver.

They both have lived in the US since 2010.

Make sure that you file the appropriate FBAR/FINCEN114 paperwork for each year and by April 15th of this year if the money is still in Australia. (I would get it out of there as soon as practical)

By removing the funds in Australia, does this cause a taxable event for my clients in Australia?

Make sure you file original returns for the last 3 years.

Original returns have been filed and I plan to follow the SDOP by Amending the prior three years and writing in Red on the top of each Amended Return "STREAMLINED DOMESTIC OFFSHORE"

Now the Superannuation fund has an opportunity to be non-taxable on the US return. There is a way that a tax attorney can review the tax treaty and render a written tax position. (they will charge for this)

I would verify that they did not contribute to the fund through a payroll deduction. Not contributing would be unusual and changes how the trust money is reported.

My clients have not contributed to the fund since 2009 when they worked in Australia. Taxpayer (Australian) moved to the US in 2010 with his wife (American).

You next have to figure out if it is a foreign grantor trust or Employee benefits trust. If employee benefits trust it must be reported on the 1040 and ownership needs to be reported on Form 8938 if the threshold requirements are met
If they make > 120K per year they make have to pay tax on the income.

In 2016 and prior years, income was less than 120K. I believe it is a Employee Benefit Trust but would make it a Foreign Grantor Trust?

The Superannuation is not qualifying income for the foreign earned income exclusion - however you can use foreign tax credits to offset the us taxes on any income.

Is this still true if we get written tax position from the tax attorney? If not, then what does the written tax position cover - not having to report on the FBAR?

Next issue you have is do they control where the money is invested? Can the taxpayer direct what investments are made? (even if they don't but still have the ability then they have control)

If they make the decisions then this can cause the superannuation to be a foreign grantor trust (or a self managed superannuation fund (SMSF))

My clients to not have control, it is not self directed.

Reporting the trust on the FBAR again I would rely on the tax attorneys opinion. It is a gray area and since the taxpayer wont own 50% of the assets a written opinion as to why you took the position you did; should be on any written tax position.

Can you please explain what you mean by "the taxpayer wont own 50% of the assets"?

I hope this helps a little. It is a difficult area.
UNDER ANY CIRCUMSTANCE - always file an explanation of the positions you take when preparing the tax return (8275-R).

DISCLAIMER: This does not constitute legal or accounting advice. The contents of this message are my opinion and all content should be thoroughly researched and legal counsel consulted in any matter stated above.

I can't thank you enough for taking the time to respond to my questions. Your responses have been very helpful and I truly appreciate that additional information you provided.

[JohnH]

Are you sure you want to get involved in this?
The potential risks are enormous.