Our office is advising dozens of clients (including many HSBC customers) regarding offshore accounts, all…
Should I close my foreign account?
Suppose you have a foreign bank account holding more than $10,000. You may have inherited it, used it to hide money during a dispute with your spouse or business partner, or just done it on a whim.
As you try to justify an easy way out, you might note that the account hardly throws off any income and you don’t even receive statements. With the fees the foreign bank charges, it probably loses money. You might feel justified in sweeping the whole mess under the rug, trying to close up the little untidiness.
Foreign accounts and assets are being scrutinized by the IRS and FinCEN (the Treasury Department subdivision that reviews FBARs). The stakes are high, with huge civil penalties and even jail time possible for those who fail to come clean. And that brings up the inevitable question: how to start to come clean without jumping into the IRS voluntary disclosure program and paying a 27.5 percent penalty on your highest account balance?
At tax return filing time, should you check the box on Schedule B noting that you have a foreign bank account? Should you report all of the income from your foreign accounts or assets? Should you file Form 8938? Should you file a Report of Foreign Bank and Financial Accounts (FBAR), Treasury Form TD F 90-22.1? Yes to all of the questions.
But if you have not been compliant in the past, should you do so now? If you didn’t disclose the account on your tax returns and owe tax from the past, you face a tough choice. Staying hidden forever seems unlikely and is highly risky.
But if you file your first tax return reporting such items and/or your first FBAR and the IRS asks for past FBARs and asks questions about your past returns, you can’t lie. The choices are tough enough that you should clearly get advice from an experienced tax lawyer based on a full disclosure of your facts.
Can you just close your account and not try to fix the past? Perhaps you can even give the money to charity abroad without repatriating it? These are common fantasies, but they rarely serve as a bona fide way out of the mess. If you close your foreign account tomorrow, you still have income and reporting obligations from past years. You even have them for the current year up to the date of the closure. That exposure does not go away for at least 6 years, which is too long. Also your account closure activity may cut off liability for future periods, but it could backfire. Quietly closing an account and disposing of the funds can be seen as evidence of willfulness, intent, and knowledge of the violation of law.
In the end, closing your foreign account is not a solution. A voluntary disclosure under the IRS program is likely the best risk-free (not penalty free) solution. In some cases, you may be able to do a “quiet disclosure,” although that is something the IRS discourages. Not wanting to be discovered is a poor excuse for continuing to ignore the rules. You should start filing correctly, but you should also correct the past, and the best way to do so is a voluntary disclosure.
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