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Definition of Financial Institutions As It Applies To Foreign Investments

April 13, 2016


As we are working on tax returns for many U.S. clients with international investments, we find that there is a false sense of security based on the information from the people who sell them the foreign investment. There are two issues that are of concern. For the tax payer, who is filing their return, if we fail to do the correct thing there is a minimum civil penalty of $10,000 or a penalty of 50% of the value of the asset. Another important issue is the Tax Preparer Civil penalty of $10,000.One of the issues is talking about ways to avoid declaring assets that you have in your possession. The other issue is asking the preparer not to disclose it on their tax return. In either question the penalties above apply. Also, these penalties are very difficult to get removed.

Our firm has been very successful in getting these penalties removed or reduced, but it has taken a Tax Manager who is very soft spoken and excellent in communication, and myself and our staff who has a considerable amount of knowledge on international tax issues to get this done properly. One of the major questions is “What is a Financial Institution?”. The general definition is it holds financial assets for the account of others as a substantial portion of its business. The fact that an entity is subject to the banking and credit laws of the United States is relevant to, but not necessarily determinative of whether that entity qualifies as a financial institution under section 1471 (d)(5)(A). Also entities, that as a substantial portion of their business, hold financial assets for the account of others is relevant to but not necessarily determinative of whether that entity qualifies as a financial institution under section 1471(d)(5)(B).

The third category of financial institutions are entities that are engaged or hold themselves out as being engaged in the business of investing, reinvesting or trading in securities including a futures or forward contract or option in such securities, partnership interests or commodities. A dealer in precious metals, stones or jewels or a licensed sender of money, or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system, or any network of people who engages as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system is a financial institution.


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