Tax Law Center Blog

By Parag P. Patel, Esq. | Updated August 26, 2016

The Internal Revenue Service recently once again issued its annual reminder to US persons to report foreign accounts and foreign income.  The reminders issued because of the widespread confusion and misunderstanding that exists among most US persons with foreign assets.

Part of the confusion about reporting foreign assets arises from the fact there are two separate reporting regimes. One regime is under the Bank Secrecy Act, while the other regime was enacted within the Internal Revenue Code.

The first regime pertains to the Foreign Bank Account Report, sometimes referred to as the “FBAR.” The FBAR is same as the Financial Crimes Enforcement Network Form 114. The law requires U.S. citizens, business entities and permanent residents to submit Form 114 each year if the sum of their foreign bank and securities accounts exceeds $10,000 at any point in time during the tax year. The form is required to be submitted electronically by June 30 of each year for the preceding tax year, with no ability to extend the due date. Beginning in 2017, Calendar 2016 reports will be due April 15 with the chance of a six-month extension.

Failure to file the FBAR carries very high civil and/or criminal penalties. The civil penalties are determined by two factors: Did you report the income in your tax return and was the failure to file “willful.” The civil penalties range from the civil, non-willful penalty of $10,000 to as much as the civil willful penalty of 50 percent of the highest balance in all of your foreign accounts for each year of the most recent six tax years. The criminal penalties are above and beyond the civil penalties and a myriad of other penalties that may apply. The criminal penalties can include an additional fine up to $500,000 and up to 10 years imprisonment.

That second regime requires completion of IRS Form 8938 with your tax return in each year that the sum of your highest balances/values exceeds $50,000 at any point during the tax year. The good news about this regime is the penalty is only $10,000 for each year you fail to file the form. The penalty can run up to $50,000 if the IRS contacts you and you fail to respond.

The IRS reminder notice is provided below.

Foreign Account Filings Top 1 Million; Taxpayers Need to Know Their Filing Requirements

IR-2016-42, March 15, 2016

WASHINGTON — Strong and sustained growth of taxpayers complying with foreign financial account reporting reflects improving awareness and compliance of this important part of offshore tax rules, the Internal Revenue Service said today.

“Taxpayers here and abroad need to take their offshore tax and filing obligations seriously,” said IRS Commissioner John Koskinen. “Improving offshore compliance has been a top priority of the IRS for several years, and we are seeing very positive results.”

By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, known as the “FBAR.” It is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCen).

In 2015, FinCen received a record high 1,163,229 FBARs, up more than 8 percent from the prior year. In fact, FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCen data.

Filings of IRS Form 8938, Statement of Specified Foreign Financial Assets, are another sign of growing awareness of foreign reporting requirements. Taxpayers filed more than 300,000 Forms 8938 with their tax returns for tax year 2014, roughly the same as the prior year and up from about 200,000 for tax year 2011, the first year of the form.

Form 8938 resulted from the Foreign Account Tax Compliance Act, known as “FATCA.” The filing thresholds are much higher for this form than for the FBAR.

Filing Requirements

Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015 must file FBARs. It is due by June 30 and must be filed electronically through the BSA E-Filing System website.

Generally, U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad. The lowest reporting threshold for Form 8938 is $50,000 but varies by taxpayer. See the form’s instructions for more information.

IRS.gov provides the best starting place for international taxpayers to get answers to their important tax questions. The International Taxpayers page on IRS.gov is packed with information. The web site also features a directory that includes overseas tax preparers.

International taxpayers will find the online IRS Tax Map and the International Tax Topic Index to be valuable sources of answers. The IRS also has videos to assist international taxpayers. See IR-2016-03 for more.

By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return. In addition, key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns.

The law requires U.S. citizens and resident aliens to report worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

More information on the tax rules that apply to U.S. citizens and resident aliens living abroad can be found in, Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

About the Author

Parag P. Patel, Esq. brings over three decades of experience to individuals and businesses facing complex tax problems. Holding advanced degrees from Georgetown University Law Center (J.D.) and New York University School of Law (LL.M. in Tax Law), the nation’s top tax programs, Mr. Patel delivers sophisticated and creative strategies in complicated federal and state audits, penalty abatements, and foreign asset/income reporting. His practice emphasizes international tax matters, specifically foreign financial account reporting (FBAR), voluntary disclosures, and penalty defense.

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