As a tax supervisor at MP CPAs, one of the most challenging areas I help clients navigate is global tax compliance. For high-net-worth individuals and businesses with international holdings, understanding and adhering to U.S. foreign tax reporting requirements is not just complicated—it’s essential to avoiding costly penalties and legal risks. On a recent episode of the Knowing What Counts podcast, I had the opportunity to dive into this topic and share some of the most critical aspects U.S. taxpayers need to understand when dealing with foreign financial interests.

The first thing I always explain is that the United States follows a global income taxation model. That means if you’re a U.S. citizen or resident, you’re required to report and pay taxes on all income—regardless of where in the world it was earned. This is very different from the approach many other countries take, where only domestic income is taxed. While tax treaties and foreign tax credits can often help reduce or eliminate double taxation, they do not reduce the complexity of the compliance process. Understanding the specific treaty terms and filing requirements is vital if you want to avoid serious penalties.

Two of the most commonly overlooked foreign tax forms are the FBAR (Foreign Bank Account Report, or FinCEN Form 114) and IRS Form 8938 (Statement of Specified Foreign Financial Assets). If the total value of your foreign financial accounts exceeds $10,000 at any time during the year, you’re required to file an FBAR. This isn’t limited to personal accounts—it includes any account where you have signature authority, including business accounts. Form 8938, on the other hand, is filed with your tax return and has higher thresholds—$50,000 at year-end or $75,000 at any point during the year for single filers, with higher limits for joint filers. Both forms ask for overlapping information, but they are distinct requirements and both must be filed when applicable.

But foreign reporting doesn’t stop at bank accounts. U.S. taxpayers are also required to report investments in foreign brokerage accounts, retirement accounts, and even direct ownership of foreign stock or interests in partnerships and funds. For example, Form 8865 is used to report investments in foreign partnerships. There are multiple filing categories based on how much control or ownership you have. If you own more than 50%, you’re a Category 1 filer, which comes with significant reporting obligations. Even smaller ownership stakes can require disclosure under Categories 2, 3, or 4, particularly if you’re contributing property or transferring funds.

One of the most complicated areas I deal with involves Passive Foreign Investment Companies—better known as PFICs. These are foreign corporations that meet either a passive income test or passive asset test. If 75% or more of their income is passive or 50% or more of their assets are held for passive income, they’re classified as PFICs. These entities come with extensive reporting obligations via Form 8621 and can trigger complex tax liabilities. What makes it even trickier is that you might not even know you own a PFIC if the investment is held through a domestic partnership or mutual fund.

The bottom line? The penalties for noncompliance are steep. Even honest mistakes—like failing to realize you have reportable foreign investments—can lead to tens or hundreds of thousands of dollars in penalties. That’s why I always tell clients: over-disclose rather than under-disclose. Review your Schedule K-1s carefully, especially the footnotes. Sometimes those contain buried clues that you’re involved with foreign investments you didn’t even know required reporting.

Working with a qualified tax advisor who understands international tax compliance is essential in today’s global economy. At MP CPAs, we use comprehensive organizers and detailed review processes to help our clients uncover and properly report all relevant foreign assets. It’s the best way to protect yourself—and your wealth—from unexpected surprises come tax time.