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Examination into Foreign Bank Account & Foreign Financial Asset Reporting and Compliance

By   Mike Criddle, Jared Johnson

August 11, 2017

U.S. taxpayers are expanding their businesses and revenue sources globally to keep up with competitive markets. And as they do so, ownership of financial accounts in foreign countries by U.S. persons have also expanded significantly. The U.S. government has a direct interest in foreign accounts held by U.S. taxpayers as they want to ensure taxpayers are not avoiding their U.S. tax obligations on the income from these accounts.   

 

In 1970, Congress passed legislation resulting in a new reporting requirement commonly referred to as “FBAR” or Foreign Bank Account Report, which requires certain U.S. taxpayers to report their foreign accounts annually. The IRS has assessed both criminal and civil penalties for taxpayers who have failed to comply with this law. Currently, the U.S. government is more active in enforcing the criminal and civil penalties and has gone to great lengths to make U.S. taxpayers aware of these annual filing obligations.

 

Due to this increased awareness and enforcement of FBAR filings, it’s important to understand the rules and laws around this filing obligation. Below is valuable information to be aware of:

 

Who Must File

The general FBAR filing requirement is defined as any U.S. person having a financial interest in or signature or other authority over any financial accounts in a foreign country that in aggregate exceed $10,000 at any point during the preceding calendar year.  A U.S. person includes U.S. citizens, green-card holders and resident aliens.  A U.S. person also includes any entity created, organized or formed under the laws of the U.S.

 

How and When to File

This filing was once completed by printing and mailing a Form TD F 90-22.1 to the Treasury Department.  However, the IRS has since changed the process. These reports are now being filed electronically through the Treasury Department’s FinCENs BSA E-Filing System using Form 114 (FBAR report). The FBAR filing is a separate filing from the annual tax return, as the IRS has a separate form (Form 8938) that is used to reporting foreign bank account information. The FBAR report is filed on a calendar year basis and is required to be received electronically by April 15th of each year for the prior calendar year. There is now an automatic 6 month extension to October 15th each year. The FBAR filing is an informational reporting obligation and does not result in any additional tax due for the year. 

 

Information Required

The FBAR filing requires the following information to be reported for each foreign financial account.

 

1 – Taxpayer ID Number

2 – Date of birth (if an individual)

3 – Taxpayer’s Name

4 – Taxpayer’s Address

5 – Maximum Account Value (per account)

6 – Name of the Financial Institution

7 – Account number

8 – Address of the Financial Institution

9 – Joint Owner Information (if applicable)

 

Other Considerations

Foreign Account Tax Compliance Act (FATCA) is one of the many ways the U.S. government is increasing enforcement of foreign bank account reporting. FATCA enforces the reporting by U.S. persons of certain foreign financial accounts and other offshore assets by requiring foreign financial institutions and in some cases foreign governments to release information related to the ownership of foreign accounts by such U.S. persons. With this information the IRS will be in a position to pursue and penalize U.S. citizens that are not compliant with their FBAR filing obligations.

 

Since 2011, the U.S. government requires U.S. taxpayers to report specified foreign financial assets on their individual US returns on Form 8398 based on meeting certain thresholds in value. The information required for these forms is substantially similar to the information reported on Form 114 to the U.S. Treasury.

The threshold for filing this form is:

  • If not married, assets valued at more than $50,000 on the last day of the tax year or $75,000 at any time during the tax year. 
  • If married and file a joint return, the threshold values increase to more than $100,000 on the last day of the year or $150,000 at any time during the year. 
  • There are additional increases to the filing thresholds if the taxpayer is living outside the U.S.   

 

The new form 8938 filing requirement does not replace the taxpayer’s obligation to file FinCEN Form 114. Individuals should file both forms if they meet each relevant filing threshold. 

 

Penalties for Not Filing

As mentioned earlier, the IRS is actively enforcing penalties for non-compliance of FBAR and Form 8938 filings. Compliance is very important as penalties can be substantial and willful violations of FBAR filings can be subject to criminal prosecution. 

 

  • FBAR Penalties
    • A person who is required to file an FBAR and non-willfully fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation (per account per year).
    • A person who willfully fails to report an account or account identifying information may be subject to:
      • Civil monetary penalty equal to the greater of $100,000 or
      • 50 percent of the balance in the account at the time of the violation.
    • If there is a reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed.
    • Willful violations may also be subject to criminal penalties and/or prosecution.

  • Form 8938 Penalties
    • Failure to file – Up to a $10,000 penalty.
    • Continued failure to file – If a notice is issued and the taxpayer fails to comply with the request for filing, the penalty is $10,000 for each 30-day period. The maximum penalty is $50,000.

 

Non-Compliant Taxpayers

The IRS has created a mechanism for U.S. taxpayers with undisclosed foreign accounts to become compliant. Taxpayers with such undisclosed foreign accounts or entities should consider making a voluntary disclosure to enable them to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution. A voluntary disclosure provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues with the IRS.  If the taxpayer meets certain qualifications, the taxpayers can enter either the Offshore Voluntary Disclosure Program (OVDP) or Streamlined Voluntary Disclosure Program (SVDP) in order to disclose any offshore delinquent reporting issues to the IRS. 

 

U.S. taxpayers need to be aware of required foreign financial account reporting. Failure to comply with the reporting requirements for foreign financial accounts carries a significant risk. Tax professionals should seek to assist their clients in complying with these reporting requirements, and if it is determined that a U.S. person has delinquent foreign account reporting, consideration should be given in participating in an offshore voluntary disclosure program offered by the IRS. Reporting of foreign accounts can be difficult, but failure to do so carries an even greater risk given the efforts by the IRS and US government to track down and bring into compliance the owners of undisclosed foreign financial accounts.  For more information about these FBAR or Form 8938 requirements, contact Michael Criddle or Jared Johnson.