5 U.S. Tax Compliance Tips for Global Assignees
Global assignment volume is increasing as companies look beyond their domestic borders to gain competitive advantage, access new markets, leverage advancing communication and technology infrastructures, and access an attractive global labor pool. As these companies expand, understanding foreign and domestic compliance requirements for their assignees can be overwhelming. There are totalization agreements and treaties between many countries, and navigating the compliance and tax obligations associated with a global assignment is complicated and often confusing.
While it is always recommended that employees work with a tax professional pre-assignment to gain a better understanding of their compliance requirements and minimize their exposure to potential tax penalties, here are five important compliance tips to be aware of:
- Companies who hire foreign individuals entering the United States on an assignment and US individuals going abroad on a foreign assignment often overlook the necessary reporting, compliance, and tax obligation requirement. In addition to residency issues, there are tax treaties, tax year differences, state requirements and related penalties for noncompliance.
- The Foreign Bank Account Report (FBAR) and Financial Crimes Enforcement Network (FinCEN114) form must be completed by certain US persons, (which includes: a corporation in which the US person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock) having a financial interest in or signature authority over a bank, securities, or other financial accounts in a foreign country. Reporting is required for accounts exceeding $10,000 at any time during a calendar year.
- IRS Form 8938 was created as part of the Foreign Account Tax Compliance Act (FATCA). Individuals holding interest in specified foreign financial assets with an aggregate value greater than $50,000, must file this form.
- The 1986 Tax Reform Act mandated certain tax filings to prevent taxpayers from hiding investments and income related to them. Form 8621 is used to report an investment in a foreign (non-US) corporation. These investments include Foreign Mutual Funds, Exchange Traded Funds, Foreign Real Estate Investment Trusts, Foreign Holding Companies, and certain other type investments that generate dividends, interest, royalties, annuities, capital gains, foreign currency gain, and gain on commodity transactions.
- There are many ways to report the Passive Foreign Investment Companies (PFIC) and filing requirements associated with the direct and indirect ownership of these funds. In addition, there may be state issues associated with these funds.
The primary risks associated with non-compliance are financial penalties which can be very high. Some noteworthy examples:
- Failure to file Form 1042-S “Foreign Person’s U.S. Source Income Subject to Withholding” has penalties that have a maximum of $1,500,000 per year and $500,000 for small businesses. Form 8938 has failure to file penalties of $10,000. If Form 8938 is not filed within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000. Form 114 has a failure to properly file penalty. You can be subject to a civil penalty not to exceed $10,000 per violation. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C. section 5321(a)(5). Willful violations may also be subject to criminal penalties under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. section 1001
- Failure to file information required by section 6038(a), Form 5471 “Information Return of U.S. Persons with Respect To Certain Foreign Corporations” and Schedule M, can result in a $10,000 penalty imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.
- Failure to file Form 8886 “Reportable Transaction Disclosure Statement”:
- There is a monetary penalty under section 6707A for the failure to include on any return or statement any information required to be disclosed under section 6011 with respect to a reportable transaction. Generally, the penalty for failure to include information with respect to a reportable transaction is 75% of the reduction in the tax reported on the income tax return as a result of participation in the transaction or that would result if the transaction were respected for federal tax purposes, but not less than $5,000 in the case of an individual and $10,000 in any other case. The annual maximum penalty for failure to disclose a reportable transaction, other than a listed transaction, cannot exceed $10,000 in the case of an individual, and $50,000 in any other case. The maximum annual penalty for failure to include information with respect to a listed transaction is $100,000 in the case of an individual and $200,000 in any other case. This penalty is in addition to any other penalty that may be imposed.
Other risks include criminal penalties and criminal investigation, such as criminal penalties under sections 7203, 7206, and 7207 which may apply for failure to file the information required by sections 6038 and 6046.
The bottom line: companies are wise to budget money for mobile employee tax services as a talent management and retention tool. A small amount – typically under $1000 – spent up front provides an enormous return on investment:
- Avoidance of potentially tens of thousands of dollars in penalties for the assignees
- HR and payroll departments are relieved of dealing with employee tax compliance problems
- Employees can focus on their work instead of being distracted and upset by potentially large financial surprises
- Original goals of the assignment have the best chance of being met with productive and content employees