If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account exceeding certain thresholds, your possible obligations to disclose and report such account to the IRS are comprehensive and complicated. Failure to comply with those obligations can have serious consequences ranging from onerous financial penalties to criminal prosecution.
Filers report their foreign accounts by: (1) completing FBAR-related questions on federal tax and information returns, such as questions 7a and 7b on Form 1040 Schedule B, question 3 on the Form 1041 “Other Information” section, questions 10 on Form 1065 Schedule B, or questions 6a and 6b on Form 1120 Schedule N, as applicable; (2) completing and timely electronically filing the Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR); and (3) reporting those assets to the IRS on Statement of Specified Foreign Financial Assets (Form 8938).
United States persons are required to file an FBAR if: (1) the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and (2) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported. The FBAR is a calendar year report and must be filed on or before April 15 of the year following the calendar year being reported. The FBAR must be filed electronically through FinCEN’s BSA E-Filing System, and not with a federal tax return.
Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to civil monetary penalties. For penalties that are assessed after August 1, 2016, whose associated violations occurred after November 2, 2015, the IRS may assess an inflation-adjusted civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the inflation-adjusted penalty may be the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each violation. Criminal penalties may also apply to failure to properly file a complete and correct FBAR.
You must file Form 8938 if you are a specified individual (a U.S. citizen, resident alien of the U.S., a nonresident alien who elects to be treated as resident alien for purposes of filing a joint income tax return, or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico), you have an interest in specified foreign financial assets required to be reported, and the aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you.
If you are a taxpayer living abroad you must file Form 8938 if: you are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or you are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
If you are required to file a Form 8938 and you have a specified foreign financial asset reported on Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938. However, you must identify on Part IV of your Form 8938 which and how many of these form(s) report the specified foreign financial assets. Even if a specified foreign financial asset is reported on a form listed above, you must still include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you.
Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent. Criminal penalties may also apply to failure to report foreign financial assets on Form 8938.
Our Law Office can assist you in navigating the two basic issues in the Offshore Accounts arena, namely (1) Are you obligated to file; or (2) What is your liability for failing to file the required offshore reports. Both issues are complicated, and the consequence for non-compliance are severe.