FBAR and form 8938

Hi. Me and my sister are dual nationals, with an American mother and British father. We were born in the UK and have always lived and worked here, never in the US.

A few weeks ago my sister received a letter from her bank asking her to confirm her nationality and mentioning FATCA. This was the first any of us in my family had heard of it. Like many others in a similar position it was quite a surprise and has left us all feeling quite anxious to say the least.

I have now been attempting to gather information to do the streamlined tax return process and the FBAR. My mind is blown by how complicated it all is. Despite all this I am having an initial go at doing the returns without paying for an external tax advisor. Reading this forum has been a big help I must say.

I have a couple of questions about the FBAR form and the Form 8938 that goes with the tax return.

The FBAR instructions mention stating the maximum value in each account in the year. Now I have always been one to have several accounts e.g. current, ISA, savings, and changing every year to get the best interest rates.

In 2009 I received some inheritance money in the form of a cheque which I paid into my current account over the counter. I then went online and transferred it to my internet-only savings account which had the better interest rate. Now the cheque was large enough that that would be the maximum amount I had in my current account in the year. So would I declare that as the amount for both the current account and savings account, even though I'm effectively double-counting?

Same question if I closed one bank account in the year and moved all the money to a new one. Isn't this double-counting my actual available funds?

Basically I'm not sure whether to treat each account completely separately for this exercise or to look more at an aggregate position, say at 31st December.

Secondly I have money invested in a Stocks & Shares ISA which I originally opened in 2009. It contains a mixture of individual stocks, OEICs and investment trusts. I assume these have to be reported on the FBAR too?

I'm really not sure how to go about this. Does each fund/trust need to be reported separately or as the whole value of the ISA? I only get statements in April and October so how to determine the value at 31st December could also prove tricky.

Finally at my former job (I was just recently made redundant unfortunately) I was contributing to a final salary pension scheme. I assume this doesn't need to be declared on the FBAR or any of the IRS forms?

Any helpful advice would be gratefully received.

In 2009 I received some inheritance money in the form of a cheque which I paid into my current account over the counter. I then went online and transferred it to my internet-only savings account which had the better interest rate. Now the cheque was large enough that that would be the maximum amount I had in my current account in the year. So would I declare that as the amount for both the current account and savings account, even though I'm effectively double-counting?

As perverse as it might sound the answer is yes.

Secondly I have money invested in a Stocks & Shares ISA which I originally opened in 2009. It contains a mixture of individual stocks, OEICs and investment trusts. I assume these have to be reported on the FBAR too?

Yes.

I'm really not sure how to go about this. Does each fund/trust need to be reported separately or as the whole value of the ISA? I only get statements in April and October so how to determine the value at 31st December could also prove tricky.

I would include each fund. The bigger issue will be the way the IRS will tax you on the gains in those funds. PFIC filing is probably required and you will have to pay US tax at your marginal income tax rate. So you lose you tax free ISA status and also own some pretty US tax inefficient investments in it.

Finally at my former job (I was just recently made redundant unfortunately) I was contributing to a final salary pension scheme. I assume this doesn't need to be declared on the FBAR or any of the IRS forms?

Any helpful advice would be gratefully received.

No FBAR reporting on that is required as you don't have "signature authority" over a final salary pension plan.

Finally at my former job (I was just recently made redundant unfortunately) I was contributing to a final salary pension scheme. I assume this doesn't need to be declared on the FBAR or any of the IRS forms?

If you need to file Form 8938 then you should report the pension plan in Parts II and VI. Since the plan has no current value to you, you can check the box in line 4, Maximum value of asset during tax year $0 - $50,000. This is an example of a type of asset for which an FBAR report is not required, but a 8938 report is.

Thanks for the responses!

I'm really not sure how to go about this. Does each fund/trust need to be reported separately or as the whole value of the ISA? I only get statements in April and October so how to determine the value at 31st December could also prove tricky.

I would include each fund. The bigger issue will be the way the IRS will tax you on the gains in those funds. PFIC filing is probably required and you will have to pay US tax at your marginal income tax rate. So you lose you tax free ISA status and also own some pretty US tax inefficient investments in it.

Yes that is that bit that's been worrying me the most. Back in 2009 I had a bit of disposable income and interest rates were falling so I was looking for somewhere better to invest my money. Of course until a few weeks ago I was completely oblivious of the US tax implications. Had I known that I'm sure I would have taken a different path. The tax rate they apply to 'foreign' investments are quite onerous.

The ISA is held with a fund supermarket (in this case Hargreaves Lansdown). I believe the way it works is that they purchase your investment through their nominee account so you aren't technically a direct holder (i.e. you don't receive a share certificate or anything like that). That was the reason for my original question about whether to declare separately. I guess substance over form comes into play?

I didn't know whether to start a separate thread about the PFIC reporting Form 8621. I've not really found other recent threads asking about this one. I've only skimmed the instructions so far and at present that form makes very little sense to me as it uses a tremendous amount of jargon. Most of my funds are accumulation funds or set to automatically reinvest income so determining the gains or losses at this point seems like a near impossible task. I'm just trying to gather all the relevant information together right now which means trying to understand what the form requires first.

This is  useful place to understand if you need to file the 8938 at all:

https://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements

J

This is  useful place to understand if you need to file the 8938 at all:

https://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements

J

Thanks.

I noticed that the year-end exchange rates from the Treasury Dept website (which FinCEN tell you to use) are quite different to the average year rates that the IRS give on their website for doing your tax return. That lowers the threshold in GBP quite considerably.

It sounds as if you will have a large quantity of mandatory PFIC reporting. Apart from being annoyed with Hargreaves Lansdown for letting US persons buy such unsuitable investments, you will inevitably have to pay for professional assistance.

Congress intended back in 1986 when the PFIC rules were enacted that US citizens should not buy these kind of investments; and the PFIC rules do this very effectively by the means of creating a penal tax rate plus a truly complex set of anti-avoidance rules. 

It sounds as if you will have a large quantity of mandatory PFIC reporting. Apart from being annoyed with Hargreaves Lansdown for letting US persons buy such unsuitable investments, you will inevitably have to pay for professional assistance. 

Paying a tax accountant was something I was hoping to avoid but, like I said, I really find that Form 8621 almost impossible to understand. This is looking like it could end up very costly. I can't remember what was in HL's T&Cs when I opened my account in 2009 but as a dual national born and living in the UK I know at the time I wouldn't have even understood the implications.

Chaky - I have no words of advice, just sympathy as a dual UK/US citizen born in the UK and full residence in the UK with no US assets (just family).

Basically, you are penalized by having US parents. People will constantly tell you "Its fine, you have no tax to pay!" but the reality is for many of us whilst this may be true, proving it will end up costing us.

As an example, not just costing us financially to see an advisor, but I have spent virtually every evening after work for the last 4 weeks researching this extensively and filling out 7 years of FBAR and 4 years of tax returns for me and my wife (also a dual citizen strangely). Time is "money" - it has affected my time with the kids (1 & 3yrs old), my work time, has been a distraction, etc. And paying someone might be necessary just to get clear answers but when you are on 1 salary, earning the lowest gross family income since marriage with 2 small children and little disposable income, I don't see why people like us should have to pay substantial money to prove we don't owe money...and tax and cost of living is much higher in the UK anyway!!

I feel your pain! Good luck though. 

J

Here is a link to their current terms and conditions: http://www.hl.co.uk/funds/terms

HL is expecting you to find this particular subsection of their T&Cs on your own, and warrant that you are not a U.S. person. Ideally, they would know their U.S. clients and have a system which automatically prevents such people from pressing the "buy" button for a fund.

You will have to decide if you now want to liquidate all your funds, and replace them with direct investment in a portfolio of stocks. To carry on with PFIC reporting and taxation for many years ahead is going to be very costly. For example, Greenbacktaxservices.com say Reporting Passive Foreign Investment Company (“PFIC”) – Form 8621- $149. That's per investment. I'm not specially recommending that company, but they are useful as an example since they make public a menu of prices. Of course the tax might be the more serious cost, depending on what you hold.

The alternative solution is to retire your U.S. citizenship permanently and re-enable yourself to invest in U.K. funds comfortably.

As for understanding Form 8621, there is a recent explanation here concerning what one has to calculate if selling a PFIC. http://hodgen.com/back-to-basics-how-to-report-gain-on-the-sale-of-a-pfic/
If you are very handy with spreadsheets it is possible. But reading this may also just increase your tears. As ukusjdd has just written, I sympathise.

As an example, not just costing us financially to see an advisor, but I have spent virtually every evening after work for the last 4 weeks researching this extensively and filling out 7 years of FBAR and 4 years of tax returns for me and my wife (also a dual citizen strangely). Time is "money" - it has affected my time with the kids (1 & 3yrs old), my work time, has been a distraction, etc. And paying someone might be necessary just to get clear answers but when you are on 1 salary, earning the lowest gross family income since marriage with 2 small children and little disposable income, I don't see why people like us should have to pay substantial money to prove we don't owe money...and tax and cost of living is much higher in the UK anyway!!

I feel your pain! Good luck though. 

Thanks. Yes I can certainly sympathise. So far it has taken up quite a bit of my time, firstly in trying to understand what to do and then trying to gather all the necessary information going back years. Finding out about this coincided with my job of many years being made redundant which came as another shock.

I understand the aim of the US legislation to catch multi-millionaires trying to avoid US tax. But it seems so poorly thought out. They are catching a lot of low to middle income families in the same net and it's going to cost those people a lot of money and/or anguish, often to prove they owe no US tax - it seems crazy!

You will have to decide if you now want to liquidate all your funds, and replace them with direct investment in a portfolio of stocks. To carry on with PFIC reporting and taxation for many years ahead is going to be very costly. For example, Greenbacktaxservices.com say Reporting Passive Foreign Investment Company (“PFIC”) – Form 8621- $149. That's per investment. I'm not specially recommending that company, but they are useful as an example since they make public a menu of prices. Of course the tax might be the more serious cost, depending on what you hold.

Wow, that's a scary thought. I wonder if I could get them to do it for just one fund so I can understand the method and then do it myself for the others. I haven't actually sold much that's in there. The strategy was a long-term investment of several years so I tried to diversify and then leave it mostly untouched. Any gains/losses that I have in there at this point are mostly notional ones. And I'm not talking massive amounts but when the tax rate is close to 40%... well it's not nice to think about.

I have not spent a long time going through the instructions for 8621 yet so I don't currently understand what QEF or Mark To Market even mean.

Do the popular tax software programs like TurboTax or TaxAct not take you through Form 8621?

The alternative solution is to retire your U.S. citizenship permanently and re-enable yourself to invest in U.K. funds comfortably.

I have for the first time in my life been giving serious consideration to renouncing my citizenship. The costs at this point seem to be massively outweighing any benefits. I have family in the States who I visit every couple of years so I don't want anything to jeopardise my ability to do that. And so my immediate problem is getting my taxes up-to-date.

Secondly I have money invested in a Stocks & Shares ISA which I originally opened in 2009. It contains a mixture of individual stocks, OEICs and investment trusts. I assume these have to be reported on the FBAR too?

I'm really not sure how to go about this. Does each fund/trust need to be reported separately or as the whole value of the ISA? I only get statements in April and October so how to determine the value at 31st December could also prove tricky.

I actually found this information at the same website that RW linked to.

http://hodgen.com/when-do-you-report-pfics-on-fbars/

Foreign mutual funds are considered financial accounts for FBAR purposes. What if the respective funds are held in a foreign brokerage account? In that case would it suffice to report the brokerage account itself without listing individual mutual funds?

TL; DR: The answer is “yes”

A foreign mutual fund held in a foreign brokerage or investment account does not need to be separately reported on the FBAR; reporting the account that contains the fund is sufficient. If you own a foreign mutual fund directly and NOT through a foreign brokerage or investment account, the mutual fund itself must be reported on your FBAR.

So if this is correct (and they sound pretty confident) I would only have to put the total value of the HL ISA account on the FBAR and not list every separate fund within it.

Of course valuing the account is still an issue because HL only give statements twice a year: 30 April and 31 October.

If you need to file Form 8938 then you should report the pension plan in Parts II and VI. Since the plan has no current value to you, you can check the box in line 4, Maximum value of asset during tax year $0 - $50,000. This is an example of a type of asset for which an FBAR report is not required, but a 8938 report is.

RW, you and nun seem to agree that no FBAR is required for the pension.  What makes you comfortable that the individual does not have a financial interest in the pension, or do you believe it is not an account?

RW,  what makes you comfortable that the individual does not have a financial interest in the pension, or do you believe it is not an account?

The OP told us he had contributed to a defined benefit scheme. Here is a copy of my enquiry to fbarquestions@irs.gov on 19 June 2014.

MY QUESTION: Good morning. I hope you can please help me with this question.

Within the FBAR instructions, the definition of a Financial Account, I read "A financial account includes, but is not limited to, ..."

I would like to know if my UK employer-provided pension plan is a reportable account for FBAR. I am not yet retired so I have no access currently to any funds in this account. My eventual pension will be based on my years of service and salary at the point of retirement.

ANSWER: Generally, most governmental and employer sponsored foreign defined benefit retirement accounts are not reportable.   A foreign defined benefit plan is not designated for any particular individual.  The plan covers multiple individuals in a general pension account.  With no account to report, no FBAR  is required.

However, a foreign defined contribution retirement account held by the individual (similar to IRA) should be reported.  These accounts are generally held in the individual's name or for the individual's benefit and allows the individual participants to direct the investment of contributions made to the employee plan.  In this case, the individual participant has a "financial interest" and therefore is required to file the FBAR.

Sincerely,

Claudia Williams (Merritt)
Senior BSA Tax Law Specialist
CTR Operations
BSA Compliance Department