Foreign Bank Accounts
Taxpayers that are citizens or residents (for tax purposes) of the United States or domestic entities and that have bank or other financial accounts in foreign countries may be required to file FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938, Statement of Specified Foreign Financial Assets.
Report of Foreign Bank and Financial Accounts (FBAR)
FBAR’s must be filed by June 30 of the year following the year the account holder meets the $10,000 threshold requirement. This deadline may not be extended, and, failure to timely file the FBAR may result in a penalty of up to $10,000 for each year of non-filing per account per person if the reason for non-filing is due to non-willful conduct. If the failure to file is due to willful conduct, then the penalty is up to the greater of $100,000 or 50% of the aggregate balances per year and criminal liability may also be asserted.
Taxpayers may be required to file an FBAR if:
- The taxpayer had a financial interest in or signature authority over at least one financial account located outside of the United States; and
- The aggregate value of all foreign financial accounts exceeded $10,000 USD at any time during the calendar year to be reported.
Unfortunately, it is very easy for a taxpayer to trigger these requirements. For example, a taxpayer may be required to file an FBAR and or other informational returns if they:
- Receive a gift or inheritance from a relative or friend that resided in a foreign country, and the funds are deposited into the taxpayer’s foreign bank account or into a foreign account where the taxpayer is a joint account holder.
- Transfer funds to a foreign account in their home country to support family members or purchase real estate.
- Retain a foreign bank or investment account after becoming a U.S. resident. Once the balance is over $10,000 USD at any point during the year, an FBAR must be filed even if the funds were earned prior to becoming a U.S. resident.
- Participate in a government sponsored retirement account and the account has not been reported to the IRS.
Although failing to file an FBAR may be inadvertent, the failure to disclose the foreign accounts, assets or income may have severe consequences in the form of significant civil penalties and possible criminal liability. The IRS has currently offers two types of voluntary disclosure programs by which taxpayers may come forward and disclose any previously undisclosed foreign accounts, assets and income.
Offshore Voluntary Disclosure Program (OVDP)
The first program is the Offshore Voluntary Disclosure Program (OVDP), whereby a taxpayer must submit an application and meet the necessary eligibility criteria. Upon approval, the taxpayer must compete the necessary requirements of the program, which include the following:
- Amend up to eight prior year federal income tax returns
- File up to eight years of FBARs
- Pay any interest and penalties that may result from amending prior year returns
- Submit payment of the Title 26 Miscellaneous Offshore Penalty (27.5% of the highest aggregate balance of unreported foreign accounts)
Although the program requirements are extensive and the twenty-seven and a half percent civil penalty (27.5%) is high, it is significantly less than what a taxpayer may face should the IRS audit them. Furthermore, the OVDP significantly minimizes the risk of criminal prosecution. If a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.
Streamlined Compliance Procedures Program
The IRS announced the Streamlined Compliance Procedures program in the summer of 2014 as an alternative to the OVDP for non-willful taxpayers to disclose foreign accounts. The specific eligibility requirements for the Streamlined Compliance Procedures for U.S. residents are as follows:
- Applicable non-residency requirement is not met;
- Previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed;
- Failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and or other informational returns, and
- Such failures resulted from non-willful conduct.
Eligible taxpayers will only be subject only to the Title 26 Miscellaneous Offshore penalty, which is reduced five percent (5%) of the aggregate end-of-year foreign account balance. Taxpayers will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties. A critical distinction from the OVDP is that the Streamlined Compliance program requires taxpayers to certify under penalties of perjury that their failure to comply with all U.S. tax requirements was due to non-willful conduct. With the Streamlined Compliance Procedures program, if willful conduct is uncovered, or if there is fraud or misrepresentation in submitting the petition, taxpayers may face significant civil penalties and possible criminal liability.
We welcome you to contact Ortiz & Gosalia with regard to reporting foreign bank accounts and any of the above-described IRS forms and programs. Call us at (425) 633-2004, send an email to firstname.lastname@example.org, or use our online form. With Seattle area offices in Redmond, Bellevue and Kirkland, we serve clients throughout Washington State as well as those located internationally or in other U.S. states.