Be Aware of the Rules and Forms
Do you have holdings in a foreign bank or financial institution? We’re not talking about owning shares in the stock of a company that is located outside of the United States, or in a mutual fund that invests in foreign stocks, or even having an account with a foreign bank through a branch that is physically located in the United States – as long as those accounts are at a financial institution that’s located here in the United States, they don’t count as a foreign account.
But if you have a financial interest in or signature or other authority in any bank accounts, securities or investments that are actually based in a foreign country and that has an aggregate value of over $10,000, then you need to pay attention.
These accounts fall under the United States tax codes’ foreign bank account reporting (FBAR) rules, and failure to comply with them can lead to being pursued by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and facing criminal prosecution, heavy fines, and even jail time.
All of these actions are a result of Senate hearings that took place years ago after news broke of millions of American dollars being held in Swiss bank accounts and accounts in other countries without being properly reported for tax purposes.
The lack of compliance with foreign bank account reporting rules that had been in place since 1970 created a much more aggressive level of involvement by FinCEN, including new laws designed to allow them to demand data from foreign banks and financial institutions about accounts held by Americans. It has only been over the last few years that Americans who are in violation of FBAR have begun to take notice, and much of this has to do with the seriousness of the penalties that are being imposed.
The penalties for violations of FBAR vary depending upon whether they are considered willful or non-willful. Non-willful violations are subject to up to $10,000 in civil penalties and willful violations’ fines are assessed at either $100,000 or half of the balance in the violating account – whichever is greater. Imprisonment of up to five years and additional fines of up to $250,000 are also possible.
Those who hold accounts in foreign banks have a number of details that they must keep in mind in order to make sure that they are not vulnerable to prosecution. It is particularly important that when filling out the Schedule B form of the 1040 tax return, those who answer ‘yes’ to having a financial interest in or signature authority over a financial bank account must then file the FBAR paperwork – otherwise they will be considered as having “willfully” violated the laws and subject to the higher fines and possible jail time. It is also important to remember that financial accounts include all types of financial instruments, including commodity futures, option accounts and even non-monetary items such as gold.
Equally important is the fact that accounts that may be in your name, but which you may not be aware of, still will count against you. Many taxpayers who have relatives living abroad have found out that their name was included on a bank account for emergency purposes without them being notified of it or having actually invested in the account.
These accounts are subject to FBAR rules as long as they are worth $10,000 or more at any point during the tax year. Other accounts that may not be initially identified include those held by internet gambling websites or online casinos, many of which are located outside of the country.
Those who need to report foreign bank accounts should use the FinCEN Form 114. The filing deadline is June 30th, with no available extensions, though in 2017 the deadline will change to April 15th with a six-month extension. Some taxpayers responsible for FBAR will also need to file Form 8938. This applies to a different class of foreign assets which don’t require filing unless a much higher threshold of value is met.
The threshold for filing Form 8938 for those who are married filing jointly is a value of $100,000 at the end of the year for certain financial assets, or $150,000 at any other time. The thresholds change again if the taxpayers live abroad, rising to $400,000 at the end of the year and $600,000 for the rest of the year, while those who are not reporting as married filing jointly must report for assets valued at half of the amounts cited.
Failure to file Form 8938 evokes a penalty of $10,000 per year, and if notice is sent out by the IRS of failure to report, continued failure beyond 90 days can lead to the fines climbing fivefold. In light of the serious ramifications of failing to comply with FBAR rules, it is essential that any foreign accounts are properly accounted for and reported. For help in doing so, contact our office today.
Our staff will be happy to provide you with a personal consultation that will review your options and make sure that you are compliant with your foreign tax reporting.