Every year we have new clients come to us to have their personal tax returns prepared because they are finding complying with the U.S. tax laws too complicated or preparing the returns consumes too much of their time. So to save $100 – $200 to have a return prepared by a tax professional, they were using a tax preparation firm where the employees receive minimal tax law training or self-prepared their return using TurboTax or another software product. When reviewing the prior year’s return, we often find that they have failed to comply with the U.S. tax and other laws and are subject to very onerous penalties.
For example, let’s look at the Bank Secrecy Act (BSA) that 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 (commonly called FBAR), through FinCEN’s BSA E-Filing System. Financial accounts that must be reported include bank accounts, brokerage accounts, mutual funds, trusts, cash values of life insurance policies, or other types of foreign financial accounts with balances that exceed certain thresholds. 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. Unfortunately, many good-meaning taxpayers are not aware of these complex laws and fail to report their foreign accounts and thus find themselves possibly subject to very significant penalties as discussed below.
WHO MUST FILE A FBAR? A U.S. person is required to file a FBAR if: The 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. That’s right! If you transferred funds into a foreign account and then immediately transferred those funds to a U.S. account in a matter of seconds, if the aggregate account balances exceeded $10,000 only briefly, you are subject to FBAR reporting.
WHO IS A U.S. PERSON? U.S. persons include U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the U.S. or under the laws of the U.S.; and trusts or estates formed under the laws of the U.S. A person with “signature authority” is a person who can control the disbursement of money or other property in the account using his or her signature. A person with “other authority over an account” is a person who can exercise power over an account by communicating directly, orally or otherwise, to the financial institution or other person maintaining the account. A U.S. person has a financial interest in an account for which the U.S. person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or the benefit of others, including non-U.S. persons. So if your foreign-based parents add your name to their foreign bank account so the funds can easily be transferred to you, you have unwittingly become subject to FBAR. There are other persons who qualify as a U.S. person that are too numerous to mention.
EXCEPTIONS TO THE FILIING REQUIREMENTS: Yes, there are reporting exceptions, but they are few and restricted.
PENALTIES FOR NONCOMPLIANCE: Persons required by law to file an FBAR, and who fail to properly file a complete and correct one, may be subject to civil penalties for negligence, a pattern of negligence, non-willful violations, and willful violations. The purpose of imposing penalties for violations is to encourage filing compliance. Each IRS examiner has discretion in determining the amount of the penalty, if any, taking into account the facts and circumstances of each case. FBAR penalties are determined per account, for each person required to file.
Non-willful violations: A penalty, not to exceed $10,000, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements that are not due to reasonable cause.
Willful violations: Persons who willfully fail to report an account may be subject to a penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation. Willful violations may also be subject to criminal penalties.
REPORTING AND FILING INFORMATION: A U.S. person who holds a foreign financial account may have a reporting obligation, even if the account is not producing taxable income. 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. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed the standard FBAR reporting due date to from June 30 to April 15 beginning with the 2016 calendar year report. In addition, for 2016 and later years, a six-month extension for filing FBARs is allowed.
OFFSHORE VOLUNTARY DISCLOSURE PROGRAM: Effective July 1, 2014, the IRS modified the Offshore Voluntary Disclosure Program (OVDP) to make additional options available to U.S. taxpayers with undisclosed foreign financial assets. Since the launch of the first OVDP program, more than 45,000 taxpayers have come into voluntary compliance, paying an estimated $6.5 billion in taxes and penalties. Due to the significant penalties involved, we generally recommend that such a taxpayer seek legal counsel representation.
Hoping you now understand that the penalties for noncompliance with the FBAR, FATCA, and OVDP programs are so harsh that it’s more prudent to be in compliance.
If you want to discuss your business or personal tax planning, tax preparation and other financial 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.
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