How to Report a Foreign Brokerage Account to the IRS

How to Report a Foreign Brokerage 

For US taxpayers who have foreign brokerage accounts, the US tax and reporting implications can be very onerous. That is because taxpayers with foreign accounts such as bank accounts and investment accounts are required to report these accounts annually to the Internal Revenue Service and FinCEN on various different international information reporting forms each year. Some of the forms are more complicated than others – and the due dates of the different forms can vary as well. Moreover, some tax forms may be on automatic extension while other forms require the filing of IRS Form 4868 or 7004. Finally, some IRS foreign tax forms are only required if a tax return is being filed (such as Form 8938) while other forms are required to be filed whether or not the taxpayer must file a tax return if they are considered to be US persons (such as Form 3520, 5471 and 8621) — and still, there are exceptions to these rules too. Let’s look at the basics of how a US person would report a foreign brokerage account to the U.S. Government.

Total Value of Account Reported (with all Assets)

In general, the total value of the account is reported for purposes of FBAR and Form 8938. For example, if a taxpayer has a foreign brokerage account with $2,000,000 in it and within the account, there are various investments, funds, stock portfolios, and other types of investments then for purposes of the FBAR and Form 8938 — the total value of the account is reported and not each individual investment within the portfolio. Still, there are exceptions to this rule but the general proposition is if there is an account then you report the maximum account value.

Foreign Mutual Funds and ETFs

When a foreign brokerage account contains foreign mutual funds, ETFs, and other pooled funds, there is additional reporting in years that there is either an excess distribution or the aggregate value of all funds combined exceeds the minimum threshold for having to file a Form 8621. Even if a person already reported the brokerage account on the FBAR for example, if either of the above-referenced threshold requirements is met, then the Taxpayer must also parse out each fund specifically on a separate Form 8621. Also. Form 8621 is still required even if the tax return is not necessary, possibly for example because the Taxpayer’s income is below having to file a tax return in that year.

Foreign Stock (Form 8938)

Unlike foreign mutual funds, foreign stocks and other securities are usually not parsed out from the brokerage account to be included separately on the tax return. Rather, the taxpayer includes the total value of the account inclusive of the stock for any of the reporting requirements such as the FBAR and Form 8938.

Foreign Stock (Form 5471)

If the taxpayer owns foreign stocks sufficient to own more than 50% of a foreign corporation, then generally the corporation will be considered a Controlled Foreign Corporation and then the Taxpayer may have to file an annual Form 5471 (Form 5471 is required in various other circumstances as well). Typically, majority shareholders of foreign corporations do not own the stock within a brokerage account but rather individually by the taxpayer — or possibly in a holding corp. Nevertheless, Taxpayers should be aware that if they own more than 50% there will be additional reporting requirements.

Income Tax on Foreign Stock

In general, foreign stock income is treated the same way as U.S. stock income for tax purposes, in that the income is reportable each year when the income is ‘distributed’ — even if it is not technically ‘received’ by the Taxpayers. When the stock is in a brokerage account, generally taxpayers can report the total value of all the dividends or capital gain generated by all the stock within the brokerage account as a single-entry period. While some taxpayers still prefer to report each stock separately – there is a potential issue that the reporting may not match the information provided by the Foreign Financial Institution (FFI) to the IRS via FATCA. Likewise, when Taxpayers own foreign stock individually and not in an account then they would report the ownership of each stock separately because the stock is not aggregated under a single account number or portfolio number.

Income Tax on Foreign Mutual Funds

When a taxpayer has foreign mutual funds, it can get infinitely more complicated from a tax and reporting perspective — especially in any year that the funds generate an excess distribution. That typically includes any year that they sell or redeem a portion of the mutual fund and or receive income sufficient to make it an excess distribution, such as when the current year’s dividends exceed the average of the (up to) three years prior by more than 125%. With foreign mutual funds, they are parsed out separately on the tax return and each fund is calculated separately since presumably, each fund has its own separate cost basis. Taxpayers who own foreign mutual funds, even if it is within a brokerage account, will want to consider making certain elections in the first year to obtain the full benefit and avoid the purging consequences of making a late election.

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

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