Individual Tax Issues: Owning Foreign Entities or Assets

Navigating individual tax returns involving foreign entities or assets presents significant challenges. Traditionally, CPA firms have handled these returns with confidence, but recent shifts in tax laws mean that longstanding practices may no longer suffice. Furthermore, the IRS now possesses more robust enforcement measures, and penalties for non-compliance are more severe than ever. 

Here are some key changes and additions to international tax laws in recent years: 

• The U.S. has transitioned to a modified territorial tax system, introducing the Global Intangible Low-Taxed Income (GILTI) tax. 
• Previously, U.S. persons were typically taxed on foreign income upon distribution. Now, certain individuals must report their share of income regardless of distribution. 
• Two new categories of foreign income have been introduced for foreign tax credit purposes:  
• Section 951A income(GILTI) 
• Foreign branch income 
• International reporting forms, such as Form 5471, have become more complex. 

Failure to report or under-report can lead to severe penalties. For instance, individuals may need to report foreign financial accounts annually on Form 114, even if no tax is owed. Failure to do so can result in penalties of up to $10,000 per account per year. Willful violations could escalate penalties to 50% of the account’s value per year. Additionally, failure to file required forms like 5471, 8858, or 8865 could incur penalties of $10,000 per form per year. 

This blog merely scratches the surface of compliance requirements in this complex area. For a more detailed discussion of client situations, we encourage you to contact McGuire Sponsel’s Global Business Services team.