- Learn about foreign-account reporting requirements.
- Find out more about the Financial Crimes Enforcement Network.
- Learn about penalties for failure to file.
- Find out what types of accounts are affected.
- Learn about Form 8938 filing requirements.
All United States entities (including citizens and resident aliens as well as corporations, partnerships, and trusts) with financial interests in or authority over one or more foreign financial accounts (e.g., bank accounts and securities) need to report these relationships to the U.S. Treasury if the aggregate value of those accounts exceeds $10,000 at any time during the year. Failure to file the required forms can result in severe penalties. The due date for foreign account reporting (FBAR) is October 15, 2020.
The U.S. government wants this information for a couple of pretty obvious reasons. One, foreign financial institutions may not have the same reporting requirements as U.S.-based financial institutions. For example, they probably won’t issue the 1099 forms to report interest, dividends, and sales of stock.
By requiring those in the U.S. to divulge their foreign account holdings, the IRS can more easily cross-check to see if foreign income is being reported on the individual’s tax return. The second (and probably more significant) reason: Information in the report can identify or trace funds used for illegal purposes or unreported income maintained or generated overseas.
Due date and extension for FBAR
For 2019, the due date for filing this report was April 15, 2020, but the government grants an automatic extension to October 15, 2020 for those who didn’t file by April 15. You do not make the Report of Foreign Bank and Financial Accounts (FBAR) filing with the IRS; rather, it involves completing Bank Secrecy Act forms and filing them electronically through the U.S. Treasury’s Financial Crimes Enforcement Network.
Failure to Report Penalties
The IRS may impose a civil penalty of up to $10,000 for a non-willful failure to report; the penalty for a willful violation is the greater of $100,000 or 50% of the account’s balance at the time of the violation. Both the $10,000 and $100,000 amounts are subject to inflation adjustment. As of February 2020, this brings them to $13,481 and $134,806, respectively. A willful violation is also subject to criminal prosecution. This prosecution can result in a fine of up to $250,000 and jail time of up to five years.
CAUTION: On Schedule B of the Form 1040 tax return, you must state whether you have a financial interest in or signature authority over one or more foreign financial accounts. If you answer yes but don’t file the FBAR, your failure to file may be considered willful. This could subject you to the larger fine and jail time.
The term “financial account” includes securities; brokerage, savings, checking, deposit and time deposit accounts; commodity futures and options; mutual funds and even nonmonetary assets (e.g., gold). Such an account is classified as “foreign” if the financial institution that holds it is located in a foreign country. Shares of a foreign stock or of a mutual fund that invests in foreign stocks are not considered foreign if held in an account at a U.S. financial institution or brokerage. So, reporting them under the FBAR rules is not required. In addition, an account maintained at a branch of a foreign bank, if physically located in the U.S, does not count as a foreign financial account.
Unforeseen Foreign Accounts and the FBAR
You may have an FBAR requirement and not even realize it. For instance, say you have relatives in a foreign country who put your name on their bank account in case of emergency; if the value of that account exceeds $10,000 at any time during the year, you need to file the FBAR. The same would be true if your name was added to several of your foreign relatives’ smaller-value accounts that add up to more than $10,000 at any time during the year. Another example: If you gamble at an online casino located in a foreign country and your account exceeds the $10,000 limit at any time during the year, you will need to file the FBAR.
Additional Filing Requirements
You may also have to file IRS Form 8938, which is similar to the FBAR but applies to a wider range of foreign assets. It also has a higher dollar threshold. File this form with your income tax return. If married and filing jointly, you must file Form 8938 if the value of your foreign financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year.
If you live abroad, these thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of the amounts above. The penalty for failing to file Form 8938 is $10,000 per year. If the failure goes on for more than 90 days after the IRS provides notice of your failure to file, the penalty can be as high $50,000.
As you can see, failure to comply with the foreign-account reporting requirements can lead to very severe problems. Have questions or need help meeting your foreign account reporting obligations? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
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