Reporting Foreign Financial Accounts and Assets
The wealthy benefit from the current tax system because investment income is taxed less than working income and inheritance is not taxed at all! Moreover, the wealthy have many more possibilities of evading taxes by transferring money to foreign accounts or by owning foreign assets, especially in low tax jurisdictions in so-called tax havens. As a result, the tax code requires the disclosure of all financial interests where the taxpayer either has an ownership interest in the assets or controls the disposition thereof; otherwise hefty tax penalties will apply. Furthermore, the statute of limitations is increased to 6 years, by the Hiring Incentives to Restore Employment (HIRE) Act of 2010, for failing to report certain offshore transactions and income.
Financial interests in foreign financial accounts or foreign assets may have to be reported to the IRS if their value exceeds certain thresholds. Foreign bank accounts and other financial accounts must be reported on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), which was formally called the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Foreign assets are reportable on Form 8938, Statement of Specified Foreign Financial Assets. If applicable, both forms must be filed. Because foreign financial interests are generally held by the wealthy, there are stiff penalties for noncompliance.
On Schedule B, Interest and Ordinary Dividends of Form 1040, in Part III, Foreign Accounts and Trusts, the taxpayer — who can be a US citizen, resident alien, trust, estate, or domestic entity or a resident alien or entity located in a US territory — must notify the IRS if they have a financial interest, where they are an owner of record or possess legal title to a foreign asset, or they have signature authority, where the taxpayer has authority over the disposition of the assets, in a foreign financial account. If so, then they are required to electronically file an FBAR if the aggregate value of the financial accounts exceeds $10,000 during any time of the calendar year — not with the IRS — but with the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury by the end of June of the following year. No extensions are allowed. So if you had $12,000 in various foreign financial accounts on March 31 in Year 1, then you must report them by June 30 in Year 2. Account statements are used to determine the maximum account value, which must be reported in US dollars, using the foreign exchange rate as determined by the U.S. Treasury Department's Financial Management Service. If a rate is not available for the currency, then another published rate can be used, which must be disclosed on Form 8938.
A civil penalty of $10,000 is imposed on the failure to file a required FBAR, if the failure was not willful and the FBAR is subsequently properly filed. If the failure was willful, then the civil penalty can be the greater of $100,000 or 50% of the account balance; additionally, criminal penalties may also be imposed.
Form 8938 must be filled out by US citizens, resident aliens, and nonresident aliens with an interest in specified foreign financial assets (SFFAs), where the total value of assets exceeds the reporting threshold. SFFAs include:
- financial accounts of foreign financial institutions,
- foreign securities,
- foreign instruments or contracts issued by a foreign party,
- interests in certain foreign partnerships, estates, and trusts.
The threshold value = $50,000 for the last day of the tax year or $75,000 at any other time during the tax year — these amounts are doubled to $100,000 and $150,000 for couples filing jointly. If a US citizen who is living abroad satisfies the 330-day physical presence test, then Form 8938 must be filed only if the total value of the SFFA exceeds $200,000 at the end of the tax year or $300,000 at any other time during the tax year; the respective values are $400,000 and $600,000 for couples filing jointly.
There are penalties either for failure to file a Form 8938 or by understating tax by omitting income earned by an undisclosed SFFA, which can be avoided if the taxpayer had a reasonable cause for the failure or omission. There is a $10,000 penalty for failing to file a correct Form 8938 by the due date, including extensions. An additional $10,000 may be assessed if the taxpayer fails to file Form 8938 within 90 days of an IRS notice, then another $10,000 may be assessed for each 30-day period afterward, up to a maximum of $50,000, which, when added to the initial $10,000 penalty, can result in a maximum penalty of $60,000. Additionally, a 40% penalty of any underpayment of tax because of an SFFA omission may be assessed or 75% if the underpayment was because of fraud.