Foreign information reporting has become one of the most important areas of compliance for U.S. taxpayers in recent years. Yet, foreign information reporting requirements often surface after the fact. A lender brings in foreign capital, establishes a subsidiary, or expands banking relationships overseas, and later realizes the compliance obligations that came with it.
The Foreign Account Tax Compliance Act (FATCA) has changed the enforcement landscape and foreign financial institutions are required to report U.S. account holders, giving the IRS visibility that did not exist before. That means gaps in reporting are easier to detect, and penalties can build quickly, even for companies that did not fully understand the requirements at the time.
For lender leadership, this is not just a tax issue. It is tied to ownership structure, capital strategy, and transaction readiness. For finance, legal, and compliance teams, it is an execution challenge that requires coordination and precision.
Understanding where these obligations arise and addressing them early can help avoid costly penalties and reduce risk as your business grows. This guide, created by the mortgage industry tax experts at Richey May, outlines the key reporting requirements, common mistakes, and ways individuals and mortgage lenders can stay compliant.
Why Foreign Information Reporting Matters
U.S. tax law requires citizens and residents to report income from all sources, and certain businesses to disclose foreign assets such as bank accounts, investments, and ownership in foreign entities. The goal is to promote transparency and prevent tax evasion. Since the rules can be complex and penalties for failing to comply can be severe, it is important that taxpayers understand their obligations and file accurately and on time.
Key Reporting Requirements
There are several forms and regulations that govern foreign information reporting. Each serves a specific purpose and applies to different types of assets or activities. The following compliance reporting items are the most common among lenders who have foreign activity, but are not all encompassing
1. FinCEN Form 114: Foreign Bank Account Report (FBAR)
Who must file: Any U.S. person with a financial interest in or signature or other authority over foreign bank or financial accounts whose aggregate value exceeds $10,000 at any time during the calendar year.
Filing details: The FBAR is filed electronically with the Financial Crimes Enforcement Network (FinCEN) and is due by April 15 each year, with an automatic extension to October 15.
Penalties: Failing to file an FBAR or filing incorrect information can lead to civil monetary penalties and/or criminal penalties.
2. IRS Form 8938: Statement of Specified Foreign Financial Assets
Who must file: U.S. taxpayers with foreign financial assets that exceed certain thresholds must file Form 8938 with their annual tax return. The filing threshold begins at $50,000 for single filers and $100,000 for married taxpayers filing jointly, however, the limits may be higher for people living outside the U.S.
Assets to report: Form 8938 covers a wide range of foreign assets, including bank accounts, investment accounts, foreign stocks and securities, ownership in foreign partnerships, and even certain types of real estate held through foreign entities.
Penalties: Failure to file Form 8938 can result in an initial penalty of $10,000, with additional penalties up to $50,000 if the form is still not filed after the IRS notifies you.
3. FATCA: The Foreign Account Tax Compliance Act
Overview: FATCA requires foreign financial institutions to report information about U.S. account holders directly to the IRS. This law has created a global network of financial transparency, with more than 100 countries participating.
Impact on U.S. taxpayers: Because of FATCA, U.S. taxpayers with foreign assets can no longer rely on offshore secrecy. Foreign banks are obligated to disclose account details, and discrepancies between bank data and IRS filings can lead to audits and penalties.
4. Form 5471: Information Return of U.S. Persons with Respect to Certain Foreign Corporations
Who must file: U.S. persons, including U.S. citizens and U.S. residents, domestic corporations, domestic partnerships, and domestic estates and trusts, who own or control certain foreign corporations may be required to file Form 5471. Filers are categorized into five filing categories, and each category has different reporting requirements based on the taxpayer’s ownership percentage and role in the foreign corporation.
Key Consideration – GILTI: U.S. shareholders owning 10% or more of a Controlled Foreign Corporation (CFC) must include their share of Global Intangible Low-Taxed Income (GILTI) in gross income annually. While GILTI is reported on Form 8992, Form 5471 is required to register CFC ownership with the IRS, and Schedule I-1 serves as the key schedule for computing the GILTI inclusion.
Beginning in 2026 under the One Big Beautiful Bill Act (OBBBA), GILTI is replaced by Net CFC Tested Income (NCTI), which eliminates the QBAI deduction from the calculation. The effective tax rate for corporate shareholders increases from 10.5% to 12.6%, the Section 250 deduction is reduced from 50% to 40%, and the foreign tax credit increases from 80% to 90%. With these changes, accurate and timely filing of Form 5471 is essential for U.S. shareholders of CFCs.
Penalties: Failure to file Form 5471 can result in an initial penalty of $10,000 per foreign corporation, with additional penalties up to $50,000 if the form is still not filed after the IRS notifies you. It may also reduce foreign tax credits available under Sections 901 and 960.
5. Other Common Foreign Reporting Forms
Foreign activities often trigger additional reporting requirements, including:
- Form 5472: For U.S. corporations that are at least 25% foreign-owned or have reportable transactions with related foreign parties.
- Form 926: For taxpayers transferring property to a foreign corporation.
- Form W-8: U.S. companies must obtain and maintain W‑8BEN or W‑8BEN‑E forms from foreign vendors, contractors, and entities to classify them as “U.S. persons” or “non‑U.S. persons” and determine withholding obligations.
- Form 1042/1042-S/1042-T: To report tax withheld under chapter 3 or chapter 4 on certain US-sourced income to foreign individuals or entities.
- Form 3520: For reporting foreign trusts and gifts from foreign individuals or entities.
Each of these forms has unique filing rules and penalty structures, and failure to file them correctly can have serious tax and legal consequences.
Risks of Non-Compliance
Ignoring foreign information reporting requirements can have significant consequences.
- Penalties and fines: Noncompliance can result in significant civil penalties and even criminal charges. Even minor errors or late filings can lead to thousands of dollars in fines.
- Increased IRS audits: Failing to disclose foreign assets raises red flags with the IRS and may result in an audit, adjustments to your tax liability, and additional penalties.
- Global financial transparency: With FATCA and international agreements, it is now difficult to hide assets offshore. The IRS can access information from banks around the world, making it much easier to catch unreported assets or income.
How to Ensure Compliance
- Stay informed: Foreign reporting rules are complex and frequently change. Taxpayers should regularly review updates from the IRS and FinCEN to understand current thresholds, deadlines, and form requirements.
- Use software or financial tracking tools: Modern tax and financial tracking tools can make it easier to stay organized. These tools can help identify accounts that meet reporting thresholds and track changes in asset values throughout the year.
- Consult a tax professional: Because of the technicality of these filings, working with an experienced tax advisor or attorney is often the best approach. We can help ensure that all forms are filed correctly, on time, and with proper documentation. For personalized guidance, reach out to our team today!
Ready to Review Your Foreign Reporting?
Foreign information reporting is a key part of U.S. tax compliance, and penalties for failing to file can be severe. With the IRS increasing its focus on offshore reporting, staying informed and proactive is essential. Reviewing your foreign financial holdings now and seeking professional guidance can help reduce the risk of noncompliance.
To speak with one of our mortgage industry tax experts, contact us at info@richeymay.com.
