If you have signature authority over a foreign financial account, or any financial interest in such an account, you may be required by the Bank Secrecy Act to file a report (FBAR) with the U.S. Department of Treasury if those accounts exceed certain thresholds. Foreign financial accounts include bank accounts, brokerage accounts, mutual funds, trusts, and other accounts.
Good News for FBAR Filers
First, the good news: a sensible change to the FBAR filing due date has been signed into law, via the seemingly-unrelated vehicle of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. For taxable years beginning after December 31, 2015, the filing date for FinCEN Report 114, the form used for reporting Foreign Bank and Financial Accounts, is April 15.
In practical terms, that means the 2015 FBAR will still be due on June 30, 2016, but the 2016 filing date will be due on April 15, 2017. In addition, the law provides the option of a six-month extension of time to file the 2016 FBAR, from April 15, 2017 to October 15, 2017. For first-time FBAR filers who failed to secure an extension of time to file, the law will also permit the Internal Revenue Service (IRS) to waive the FBAR penalty.
The filing date is now approximately six weeks earlier. Why is this good news? The change causes the report to be aligned with the income tax return deadlines for individual taxpayers, which may simplify preparation, whereas the previous due date had no real connection to any tax filing date.
Potentially Bad and Costly News for OVDP Filers
U.S. taxpayers who have undisclosed foreign accounts, but who wish to come into compliance with U.S. tax laws, may do so through the IRS Offshore Voluntary Disclosure Program (OVDP). OVDP is available to individuals, businesses and trusts subject to U.S. tax laws.
One of the primary purposes of the program is to offer amnesty to those who failed to report offshore income and/or assets. If the taxpayer makes a complete, truthful, and full disclosure through the OVDP, the IRS generally provides protection from criminal prosecution for the previous non-disclosure.
However, this protection comes at a price: a significant financial penalty based on the highest year of assets in the past eight years. Each year’s annual aggregate worth of foreign assets is compiled, and the base penalty is 27.5% of the value of the highest year—unless the assets are held by a “bad bank.” Bad banks, as you might suspect, are those foreign financial institutions the IRS suspects of assisting U.S. taxpayers of concealing assets. If your assets are held in a so-called bad bank, the OVDP penalty rises to 50% of the highest year’s aggregate worth.
The bad news for OVDP filers: the financial institutions on the IRS’ list of bad banks have increased in number as of August 5, 2015. They include the Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India), UBS AG, Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd, and many others.
The attorneys of Ortiz & Gosalia, PLLC have post-JD degrees in tax law. We can help you to understand foreign bank or financial account reporting requirements and potential penalties. With offices in Redmond, Bellevue and Kirkland, we offer services throughout the Seattle area and Washington State. If you would like to learn more about changes to FBAR and OVDP law, we invite you to contact us.