By: Jonathan Benowitz
Bronswick Reicin Pollack, Ltd.
While the IRS at large is shrinking, the enforcement arm at the IRS has been pursuing holders of unreported foreign bank accounts more aggressively than ever. Thanks to the Foreign Account Tax Compliance Act (“FATCA”) the US is threatening banks (and their governments) all over the world to give up information on American account holders. Many Americans hearing this think that the IRS is finally cracking down on those offshore tax-shelters in places like Switzerland and the Cayman Islands. Indeed, the US now has agreements with both the governments of Switzerland and the Cayman Islands, but also has agreements with or is negotiating with much of the rest of the globe to have their financial institutions reveal their US account holders. However, most American taxpayers holding foreign accounts, whether in Switzerland or in Canada, are not criminal tax evaders, but ordinary people holding these accounts for very ordinary reasons, such as an inheritance, business, an employer’s retirement account, or simply everyday banking in an increasingly global world.
The law requires that all U.S. persons with a financial interest in or signature authority over a foreign financial account, such as bank, brokerage or investment accounts and certain insurance policies must file FinCEN Form 114 if their total value exceeded $10,000 at any time during the year. There are extraordinary civil and criminal penalties for failure to file, often exceeding the value of the accounts themselves, sometimes by 300% or more. The fact of the matter is that there are millions of Americans with foreign bank accounts and only a few hundred thousand Americans file foreign bank account reports or “FBARs” each year. Many Americans living overseas and even Americans in the US with such accounts are simply not aware of the FBAR requirement.
The IRS, recognizing this fact, has been encouraging taxpayers with unreported foreign bank accounts to come forward, and those whose failure was non-willful may be eligible for a special “Streamlined” program with greatly reduced or no penalties, and the IRS is even encouraging late filing “quiet disclosure” for those who haven’t underreported their income. In addition to FBARs, FATCA requires other special reporting. Investments in foreign mutual and hedge funds and many types of companies must be reported. Also, certain gifts and inheritances from foreign persons must be reported.
BRP has long asked our clients about foreign bank accounts in our questionnaire and has followed up with clients who we suspect may have such accounts. We annually file FinCEN 114 for our clients with foreign bank accounts. If you believe you have an account that requires reporting, including pension and retirement accounts, gifts, foreign inheritances, funds held for others, or even a small non-interest-bearing bank account for when you travel, please be sure to contact your BRP professional for more details.
Foreign Bank Account Reporting Facts:
- You have to file an FBAR if the value of all your foreign accounts together exceed $10,000 any time during the year.
- The FBAR is due on June 30 of the following year. The due date cannot be extended.
- Foreign accounts that you are joint on or have signatory authority over must be reported on an FBAR. You may have to report foreign accounts of corporations, partnerships, other companies, trusts and estates that you have an interest in. Foreign pension or retirement accounts and certain foreign insurance policies have to be reported.
- Civil Penalties range from $10,000 to the greater of $100,000 or half the value of the account, per year.
Facts about the Foreign Account Compliance Tax Act (“FATCA”):
- Most foreign banks and financial institutions will be reporting information to the IRS on their US account holders.
- Since 2011, a Form 8938 has had to be filed with Form 1040 to report foreign accounts and foreign stocks and bonds.
- Investments in foreign mutual and hedge funds and foreign companies must be reported.
- Special procedures are available that may reduce or eliminate penalties for failures to file required forms.
Disclaimer: The information contained in this Blog (the “Blog”) is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will BRP, or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Blog or for any consequential, special or similar damages, even if advised of the possibility of such damages.