Similar to reporting of foreign income, the IRS requires taxpayers to report foreign bank or investment account information if the aggregate balance of the taxpayer’s financial accounts exceeds $10,000 at any time during the year, irrespective of the source of the funds. A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. If a person in the United States has 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, the Bank Secrecy Act requires them to report the account yearly to the Internal Revenue Service by filing a form TDF 90-22.1, known as the Report of Foreign Bank and Financial Accounts (FBAR). The form must be filed by June 30th of each year for information pertaining to the previous year (for example all information relating to 2010 must be filed by June 30, 2011) and no extensions apply. A “person in the United States” generally means a citizen or resident of the United States; it is not only limited to individual taxpayers but also includes partnerships and corporations.
If the total value in all of the foreign accounts in which a taxpayer have an ownership and/or interest (even if it’s authoritative rather than financial) reaches $10,000 or more at any point in the calendar year, the taxpayer will need to file an FBAR as mentioned above. That applies even if the taxpayer has been faithfully reporting the income on his/her federal income tax return and even if they have never, ever repatriated a single dollar to the United States. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions; although global banks are being asked to disclose U.S. accounts that are held overseas by U.S. persons. The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent U.S. law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.
The FBAR is a tool used to collect basic information on financial accounts overseas where a U.S. person has control over them—whether it is because they have signature authority on the account or because they can exercise control over them. The form is sent directly to the Department of the Treasury, separate from the taxpayer’s annual income tax return for the same year. Although commonly misinterpreted as a form that goes along with and makes part of your yearly tax return. It is an informational return only, meaning it will have no information on the filer’s tax liability. Even if a taxpayer filed an extension for his/her personal returns, he/she must file the FBAR (TDF 90-22.1) on time. Late filing may result in the taxpayer being subject to a penalty, unless otherwise exempted by the taxing authority.
Exceptions to the FBAR reporting requirements can be found in the FBAR Instructions at http://www.irs.gov/pub/irs-pdf/f90221.pdf. There are filing exceptions for the following United States persons or foreign financial accounts:
• Certain foreign financial accounts jointly owned by spouses;
• United States persons included in a consolidated FBAR;
• Correspondent/nostro accounts;
• Foreign financial accounts owned by a governmental entity;
• Foreign financial accounts owned by an international financial institution;
• IRA owners and beneficiaries;
• Participants in and beneficiaries of tax-qualified retirement plans;
• Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
• Trust beneficiaries; and Foreign financial accounts maintained on a United States military banking facility.
The FBAR is not the only reporting obligation for your offshore investments. You must also report your income on foreign accounts each year on Schedule B of your federal income tax return. On top of that, the IRS has created a special reporting requirement for Americans with more than $50,000 in non-U.S. assets.
Last March, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act (H.R. 2847). The HIRE Act significantly expands the scope of offshore reporting requirements if the taxpayer holds more than $50,000 of “foreign financial assets.” This Act requires taxpayers to disclose information on their foreign accounts in respect of the items listed below using an IRS form (yet to be created):
• Any ownership of non-U.S. securities.
• Any financial instrument or contract held for investment from a foreign issuer or counter-party. This would require the reporting of offshore life insurance or annuity contracts.
• Any interest in any foreign entity. Reporting provisions in current law impose an obligation for U.S. persons who acquire or dispose of a 10% or greater interest in a foreign corporation or partnership to disclose that transaction. However, no disclosure for smaller interests was previously required. Now irrespective of how much an individual owns, they will be required to disclose their interest in a foreign entity.
FBAR compliance is a serious matter, and global banks are getting more pressure than ever to disclose U.S. accounts, so this is the time to get these matters settled and file the form. Each year an FBAR is not filed timely (by June 30th) is considered a separate violation. Generally the civil penalties for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. Taxpayers hiding assets offshore who do not come forward can face high penalty scenarios as mentioned above as well as the possibility of criminal prosecution. For criminal penalties the base penalty is a maximum fine of $250,000, a maximum term of imprisonment of five years, or both. Each FBAR not filed or falsely filed constitutes a separate violation. Therefore if five FBARs have not been filed, five counts could be charged against the taxpayer. The statute of limitations for criminal penalties is five years.
The tax information contained in this article is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
Khorshed Alam is a practicing CPA and Business Valuation Analyst. Check out http://alamcpatax.com or call (408) 445-1120.