It seems like the crackdown on unreported foreign assets is in the news regularly.
What are foreign assets? To whom should we report? How do we avoid horrific penalties? Can we stay out of jail? It's a quagmire.
Let's start with simple definitions. The "foreign" in foreign financial assets means physically located outside the United States. Financial assets consist of the following:
This isn't an all-inclusive list, but it contains most common situations.
Who needs to know this information? The U.S. Department of the Treasury is very interested in this information. In fact, it has two branches that take particular interest, FinCEN and the IRS.
FinCEN is the Financial Crimes Enforcement Network. FinCEN's mission is to safeguard the financial system from illicit use, combat money laundering, and promote national security through the collection, analysis and dissemination of financial intelligence and strategic use of financial authorities.
The IRS's stated mission is:
"Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all."
This mission statement describes the IRS's role and the public's expectation about how it should perform that role.
FinCEN regulates and requires reports from banking institutions, money services businesses, insurance industries, precious metals/jewelry industry, mortgage companies, brokers and everything in between.
FBAR - FinCen Form 114
The form individuals, businesses and trusts need to be concerned about is FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces Form TD F 90-22.1 used in the past. The form must be filed by a "United States person" whose interest in, or signature authority over, aggregate foreign assets exceeds $10,000 at any time during the year.
The FBAR must be filed electronically by the following June 30. There is no extension.
For these purposes, a "United States person" means an individual U.S. citizen or U.S. resident alien or a corporation, partnership, limited liability company, trust or estate formed under U.S. laws, or created or organized in the U.S.
So what happens if you don't file? The FBAR carries a civil penalty of up to $10,000 per failure to file. If there is reasonable cause and the balance has been properly reported, the penalty can potentially be waived.
If a person willfully neglects to file or properly report an account, the penalties increase to the greater of $100,000 or 50 percent of the balance of the account at the time of the violation. Willful noncompliance can also carry criminal penalties.
The IRS has a plethora of other forms to complete to provide information about foreign interests:
Let's focus on Form 8938. Certain people must file this form if they meet the aggregate foreign financial asset values outlined in the table below. They are U.S. citizens, U.S. resident aliens, nonresident aliens who elect to be treated as resident aliens for purposes of filing a joint return and nonresident aliens who are bona fide residents of American Samoa or Puerto Rico.
|Aggregate Foreign Financial Asset Values|
|Living in the U.S.||Living Abroad|
|Single and married filing separately||Total specified foreign financial assets of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year||Total specified foreign financial assets of more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year|
|Married filing jointly||jointlyTotal specified foreign financial assets of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year||Total specified foreign financial assets of more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year|
By indicating on Form 8938 that you filed one of the other IRS forms listed above, you will not have to duplicate the information. The IRS recently did away with the requirements to complete Form 8891 for people who are beneficiaries of certain Canadian registered retirement plans.
Like FBAR, Form 8938 carries a $10,000 penalty for not filing. If the IRS sends you notice of your failure to file, you have 90 days to comply or be subject to an additional $10,000 per month, up to $50,000, until you do file.
There is a 40 percent penalty for any tax underpaid on foreign financial assets not reported. That penalty jumps to 75 percent if the underpayment is due to fraud.
Failure to file Form 8938 can also carry criminal penalties. These penalties are severe to ensure compliance. The government has procedures in place to help taxpayers become compliant in cases of non -willful failures to file.
You can go to www.irs.gov/Businesses/ Comparison-of-Form-8938-and-FBAR-Requirements to find a chart comparing Form 8938 and Form 114 filing requirements.
The days of the secret foreign account used to squirrel away "tax-free" money is coming to a close. Last October, 51 countries signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information.
Know your obligations and make sure to let your accountant know what assets you may have so you can receive professional assistance in meeting your filing requirements.