If you used a tax professional to prepare your personal income tax return, you were undoubtedly asked the question if you own any foreign accounts or have control over any such accounts. This is a question that should not be taken lightly as there are some very harsh penalties for those who are found not to be in compliance with the Report of Foreign Bank and Financial Accounts (FBAR).
If you have immigrated to the U.S. and have maintained foreign bank accounts or cash value life insurance policies, or hold such accounts jointly with a parent or other relative, or have a retirement account being held for you in a foreign country, you may find yourself in non-compliance with U.S. tax law. A law designed to catch tax cheats is now encompassing those who work in the U.S. as a permanent resident or who become a U.S. citizen.
It can get real ugly! Imagine that you were born in the U.S. when you parents were vacationing in the U.S.A. or here on business. That makes you a U.S. citizen. You now have dual citizenship. Now imagine receiving a notice from the U.S. government that as a 35-year old person who has filed your resident country’s tax returns each year and paid your taxes in full, that Uncle Sam informs you that as a U.S. citizen you are required to report your world-wide earnings to the IRS and that you have multiple years of non-compliance with the U.S.A.’s income tax and that you failed to fulfill your FBAR filing requirements.
You need to understand that your reporting responsibilities may exist even if your foreign accounts are not generating any taxable income. In such cases, the taxpayer’s reporting obligation would be met by filing an FBAR and answering the questions about foreign accounts on Form 1040, U.S. Individual Income Tax Return, Schedule B, Interest and Ordinary Dividends.
Who Must File a FBAR Report? If you are a U.S. citizen, U.S. resident, a legal entity created or organized in the U.S.A. or under the laws of the U.S.A., or a trust or estate formed under the laws of the U.S.A., AND such person had a financial interest in or signature authority over (or any other authority over) at least one financial account located outside of the United States; and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during a calendar year, such person has annual foreign reporting requirements.
The Bank Secrecy Act requires certain U.S. persons who have a financial interest in or signature authority over a foreign financial account to report the account annually to the Department of Treasury by electronically filing Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts, through FinCEN’s BSA E-Filing System. This report is due by June 30, 2016 for the 2015 calendar year (no extension allowed). Financial accounts that must be reported include bank accounts, brokerage accounts, mutual funds, trusts, or other types of foreign financial accounts.
Failure to file will subject the person to a civil penalty not to exceed $10,000 per violation for non-willful violations. If the person holds multiple foreign accounts, the penalties for non-compliance are assessed on a per account basis. Thus, the penalties can add up very quickly. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation. If there have been several years of non-compliance, it is much easier to prove willfulness and at 50% of the balance per violation, one could owe the U.S. a sum much greater than the account balance.
Individuals who are required to file FBARs need expert advice to ensure proper compliance not only with the FBAR filing requirements, but possibly with other reporting requirements such as the Foreign Account Tax Compliance Act (FATCA). FATCA requires filing Form 8938, Statement of Specified Foreign Financial Assets, with the federal income tax return, a separate requirement from the FBAR filing. FBAR is not a tax return (and it isn’t filed with the IRS, unlike Form 8938)—it is an information report. It was designed, along with other reporting requirements such as FATCA, to deter tax evasion.
As stated above, the FBAR report is due June 30, 2016 for the 2015 tax year. Beginning with the 2016 tax year, this report will be due April 15, 2017. For 2016 and later years, a six-month extension for filing FBARs can be filed.
If you want to discuss your business or personal tax planning and tax preparation concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.