June 4, 2014 – Do you or your clients have assets in foreign bank accounts? If so, you should know about a renewed enforcement effort to require annual disclosure. Failing to disclose foreign bank accounts could leave you or your clients with severe troubles.
New international tax laws affect U.S. persons who knowingly or unknowingly have authority over foreign bank accounts. U.S. persons with bank accounts held in foreign countries are required to disclose these accounts on a Report of Foreign Bank and Financial Accounts1 (FBAR). This has been the requirement since 1970. Until recently, however, filing an FBAR was a largely unknown and forgotten compliance requirement.
The introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010 means filing an accurate FBAR now is essential, because FATCA requires foreign banks to provide information on account owners that can be used to verify FBAR information.
Having another source of information directly from foreign financial institutions will make it easier for the Internal Revenue Service (IRS) to discover U.S. persons who have not accurately reported foreign bank accounts and enforce penalties.
What is the FBAR?
FBAR requirements began with the enactment of the Bank Secrecy Act of 1970. The Act resulted from Congressional concern that foreign financial institutions located in tax haven jurisdictions were being extensively used to violate or evade domestic tax and regulatory requirements. For the 2013 tax year, June 30, 2014, is the deadline for U.S. persons to timely report foreign financial accounts on an FBAR form.
Importantly, the FBAR is not part of the U.S. person’s tax return filing and is not filed with the IRS. The FBAR is filed separately with another unit of the Department of the Treasury known as the Financial Crimes Enforcement Network. This means that no extension is available for additional time to file the form.
Frederic Behrens (U.W. 2013) is an international investment advisor with Thun Financial Advisors in Madison. Thun Financial Advisors provides investment management and financial planning for Americans living abroad. Reach him by com frederic.behrens thunfinancial email or by phone at (608) 237-1318.
A U.S. person must file a FBAR if that person has a financial interest in, signature authority, or other authority over financial accounts in a foreign country and the aggregate maximum value of these account(s) exceeds $10,000 at any time during the calendar year. This includes U.S. citizens and residents, and legal entities such as corporations, partnerships, and trusts. The broad filing requirement commonly affects American citizens with foreign bank accounts, green-card holders who must file a U.S. tax return due to their permanent alien status, and corporate officers with signatory authority over foreign corporate accounts.
For the first time, the IRS will require mandatory electronic filing of FBARs on the new FinCen Form 114 before the deadline on June 30, 2014. The mandatory FBAR e-filing significantly changes how FBARs are filed.
Paid tax preparers, such as CPAs and attorneys, should review the new filing requirements before preparing any forms on behalf of clients. When in doubt over whether filing an FBAR is necessary, disclosure is usually the best option. The FBAR is not an income tax return and should not be treated like one.
Along Comes FATCA
The Foreign Account Tax Compliance Act (FATCA) became law in 2010 and is an important development in combating income tax evasion. Under FATCA, American individual and corporate taxpayers must provide comprehensive information to the IRS regarding foreign bank accounts. In addition, foreign banks must report directly to the IRS certain information about financial accounts held by American taxpayers. Primarily, FATCA requires foreign financial institutions to report to the IRS in a similar way as domestic U.S. banks.
With banks starting to become FATCA compliant in 2014, FBARs will no longer be sent to the IRS office in Detroit and forgotten. The IRS will now be able to cross-reference information from electronically filed FBARs with the information provided directly from banks. This combination will allow the IRS to identify discrepancies and noncompliant U.S. persons and entities.
Upon finding problems with information previously reported, U.S. persons could be subject to serious sanctions. There are both civil and criminal penalties for failure to file an FBAR. For willful violations occurring after Oct. 22, 2004, the maximum civil penalty is the greater of $100,000, or 50 percent of the balance of the foreign bank account at the time of the violation.
There are several options for U.S. persons who have not correctly filed previous FBARs. First, the IRS allows a taxpayer to amend a prior FBAR. Second, an Offshore Voluntary Disclosure Program (OVDP) also exists for those who did not file FBARs in previous years. The OVDP allows U.S. persons to pay taxes owed and penalties through a streamlined process to avoid criminal prosecution.
The recent changes in foreign reporting requirements are unfamiliar for many taxpayers, lawyers, and accountants. Unfortunately, there are serious penalties for noncompliance, and thus these requirements demand careful attention. The IRS is devoting more resources to international tax enforcement and violations of the FBAR reporting requirement will surely be an area of increased enforcement in the near future.
1 Formerly Form TD F 90-22.1. Now the proper form is FinCEN Form 114.