Here’s What You Need to Know
When it comes to taxes, the world is a small place and it’s getting smaller. United States citizens and residents are taxable on their worldwide income and are subject to all U.S. tax laws.
Why might you have a foreign bank or investment account?
There are many legitimate reasons.
- You might live abroad (six million Americans do), be a dual citizen, do business abroad, or get more interest from a foreign bank.
- You may have an asset protection trust to shield assets from creditors and/or litigation or have a life insurance trust for estate planning purposes in an offshore location.
On the other hand, there are illicit reasons for offshore and foreign bank accounts, such as
- Hiding drug and terrorism money,
- Laundering money, and
- Tax evasion.
The illegal activities paint offshore and foreign bank accounts with an ugly brush. Americans with offshore accounts are at the top of the IRS’s hit list. Act accordingly. Don’t hide assets from the IRS in an offshore account.
Foreign Assets Are Reported on Three Forms
There are as many as three different disclosure forms you may have to file each year if you have money or other assets in an offshore account:
- Report of Foreign Bank and Financial Accounts (also called an FBAR);
- IRS Form 1040, Schedule B; and
- IRS Form 8938, Statement of Specified Foreign Assets.
If you have or are thinking about opening, an offshore bank account or other financial accounts, you need to understand these reporting rules.
Report of Foreign Bank and Financial Accounts (FBAR)
The Bank Secrecy Act requires U.S. citizens and resident aliens to report specified foreign accounts to the U.S. Treasury. Although such reporting was legally required as far back as 1970, few people knew about it or took it seriously, including the Treasury Department.
All this changed in 2008 when Senate hearings resulted in revelations that Americans were hiding millions of dollars in Swiss and other foreign banks. The IRS declared war on Americans who try to hide assets offshore, and it to enforce existing foreign account reporting laws strictly.
To comply with the Bank Secrecy Act, you may be required to file a Report of Foreign Bank and Financial Accounts (TD F 90-22.1), called an FBAR for short (pronounced “F Bar”). When required, the FBAR must contain the name and address of each financial institution in which you held an account during the year, the account number(s), and the maximum amount in the account during the year.
If you’re a United States citizen or resident alien, you must file an FBAR if
- You have a financial interest in, or signature authority over, one or more financial accounts located outside the United States; and
- The aggregate value of such accounts exceeds $10,000 at any time during the calendar year.
What is a Financial Account?
“Financial account” includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other accounts at a financial institution (or at or with a person performing the services of a financial institution). Also included are commodity futures or options accounts, insurance policies and annuity policies with a cash value, mutual fund shares, and debit and prepaid credit cards. Nonmonetary assets such as gold are also included.
When Do I Have to Report?
If all your foreign accounts together held more than $10,000 at any time during the year, you must file an FBAR. For example, you must file an FBAR if you have three foreign accounts worth $4,000 each since their aggregate value of $12,000 exceeds $10,000.
The $10,000 rule looks at the year. You are subject to FBAR reporting when you exceed the $10,000 even if
- The average amount in the accounts during the year was less than $10,000.
- All the money was withdrawn by the end of the year.
- The account did not earn any taxable income during the year.
The Account Must Be In A Foreign Country
We’re talking about financial accounts held in foreign countries, not necessarily in foreign banks. For example, you need not report an account at a Bank of Tokyo branch located in San Francisco. But the reporting requirements would apply to an account at a Bank of Tokyo branch in Tokyo.
FBAR Is Not a Tax Form
The deadline for filing the FBAR is the same as for a federal income tax return. This means that the FBAR, Form 114, must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 15 each year. FinCEN grants filers missing the April 15 deadline an automatic extension until Oct. 15, to file the FBAR.
Here’s where you file.
Taxpayers don’t file the FBAR with individual, business, trust or estate tax returns. Taxpayers who want to paper-file their FBAR must call the Financial Crimes Enforcement Network’s Regulatory Helpline to request an exemption from e-filing.
Obtaining an extension to file your federal income tax return does not extend the due date for filing an FBAR.
Failure to File: Big Penalties and Potential Jail Time
You face big penalties, even jail time if you fail to file the FBAR. If your failure to file is inadvertent, your maximum penalty is $10,000. However, if you are found guilty of willfully not filing an FBAR, the fine is $100,000 or half the value of the account, whichever is greater. As a willful violator, you also are subject to criminal prosecution, which can result in fines up to $250,000 and jail time up to five years (doubled for repeated violations).
IRS Form 1040, Schedule B
You sign your IRS Form 1040 under the penalties of perjury. On Schedule B of IRS Form 1040, line 7a of Part III asks: “At any time during [the tax year], did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?”
If you answer yes but don’t file the FBAR, the IRS may consider your failure “willful,” which means the IRS can impose the larger fines and jail-time penalties.
IRS Form 8938, Statement of Specified Foreign Assets
U.S. citizens and resident aliens whose “specified foreign financial assets” (SFFA) have an aggregate value over a threshold amount must file IRS Form 8938, Statement of Specified Foreign Assets, with their annual tax return.
Form 8938 is similar to the FBAR but applies to a broader range of foreign assets with a higher dollar threshold. The assets covered include (1) all your foreign financial accounts; and (2) other financial assets you hold for investment, including foreign stocks, bonds, and mutual funds; foreign hedge funds; private equity funds; foreign trusts and estates; and interests in privately-held foreign entities. The threshold amounts vary according to your filing and residency status:
- If you’re unmarried or married filing separately, you must file if the value of all your SFFAs exceeds $ 50,000 at the end of the year or $75,000 at any time during the year
- If you are married and filing jointly, you must file if the value of all your SFFAs exceeds $100,000 at the end of the year or $150,000 at any time during the year.
- If you live abroad and you are single or married filing separately, you must file if the value of all your SFFAs exceeds $ 200,000 at the end of the year or $300,000 at any time during the year.
- If you live abroad and you are married and filing jointly, you must file if the value of all your SFFAs exceeds $400,000 at the end of the year or $600,000 at any time during the year.
The penalties for failing to file Form 8938 are severe, but not quite as bad as those you face with an FBAR failure to file.
The basic penalty is $10,000 per year, but this goes up to as much as $50,000 per year if you still don’t file the form after receiving an IRS notice. You could also be subject to a 40 percent accuracy-related penalty and a 75 percent fraud penalty if you underpaid tax on income you should have reported.
Filing of Form 8938 does not relieve you of the responsibility for filing an FBAR.