It’s common knowledge that the majority of U.S. citizens – around 240 million of them, according to the Internal Revenue Service (IRS) – are required to annually file a federal personal income tax return. What fewer taxpayers are aware of, with potentially disastrous consequences, is that the Internal Revenue Code contains an additional requirement pertaining to citizens who reside in, or maintain bank accounts in, foreign countries. It is hardly surprising that many taxpayers (and more alarmingly, tax preparers) are unaware of these requirements, considering the United States is the only nation on earth to enforce them, other than Eritrea. Nonetheless, ignorance of tax law is no excuse for noncompliance. Indeed, even an accidental failure to comply can result in costly penalties, while deliberate disregard for the law can lead to penalties of an even greater magnitude. In order to avoid or at least minimize these penalties, it is crucial for taxpayers to familiarize themselves with some fundamental income reporting requirements for expatriates and holders of foreign financial accounts.
No matter where in the world an individual resides, be it Switzerland, Mexico, the United Kingdom, Australia, or anywhere else, he or she will be subject to a foreign income reporting requirement known as the Report of Foreign Bank and Financial Accounts – more commonly, “FBAR” – if the taxpayer meets certain criteria, which our international tax attorneys discuss in the following section of this article.
How Do I Know if I’m Required to File an FBAR?
There are two groups of taxpayers primarily affected by FBAR laws:
- Taxpayers who live in foreign countries.
- Taxpayers who live in the United States, but maintain bank or other financial accounts in foreign countries.
If you belong in either of these groups, pay close attention to the following information, as you may be affected.
Taxpayers are required by law to file an FBAR if both of the following criteria apply:
- The taxpayer has “a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account.”
- The value of the account – or the aggregate value of multiple accounts, where applicable – exceeded a threshold of $10,000 at any time during the year, even if only for a day or two.
It does not matter whether the country in which the account exists is traditionally considered a tax haven or not. Regardless of the nation in question, the aforementioned criteria apply universally.
While this may sound simple so far, FBAR instructions are, unfortunately, anything but, highlighting the importance of receiving guidance from an international FBAR lawyer. On the contrary, there are numerous details which taxpayers must consider, such as the following:
- To determine whether the account met the threshold, taxpayers must determine the account’s peak value, however short-lived, and make an accurate conversion using the appropriate exchange rate.
- Foreign accounts must be reported, but only those held with banks outside the United States. Foreign-based banking businesses located in the U.S. are not subject to FBAR requirements, which can create confusion among taxpayers.
- It can be difficult for taxpayers to determine specifically which assets are subject to reporting laws depending on how they are classified. For example, certain foreign trusts are included, but others are not. Pooled investments are typically covered, but hedge funds are not. Without professional assistance, a taxpayer is at greater risk of accidentally omitting needed information from his or her FBAR documentation.
By no means is this an exhaustive list of the tricky specifications impacting FBAR filings. This IRS overview should give taxpayers an idea of how nuanced – and how easy to unintentionally violate – the existing FBAR regulations truly are.
When is the FBAR Deadline?
Foreign assets must be reported by filing an FBAR, an electronically-submitted tax form officially titled FinCEN Form 114 (previously known as Form TD F 90-22.1). FBAR can only be filed in one place: the BSA E-Filing System, which is a government submission portal maintained by the Financial Crimes Enforcement Network (FinCEN). Do not attempt to mail the IRS a paper copy of your FBAR, which will simply cause confusion and delays. You may, however, choose to mail a paper copy of your tax return.
The annual FBAR deadline is typically April 15. However, FBAR deadlines can be affected by the extensions, if any, requested by the taxpayer. The IRS provides a comprehensive overview of this subject here.
International Tax Attorney for Citizens Abroad
To quote an article published in the Wall Street Journal several years ago, “Experts worry that despite extensive publicity, taxpayers and even preparers are still unaware of the FBAR requirement.” In the words of one New York-based attorney, “I’ve seen scores of returns where foreign income was reported, yet the preparer checked a box saying there were no foreign accounts.”
Fortunately, you can avoid this all-too-common situation – and the financial headaches which can result – by selecting a skilled and reputable tax preparer or tax attorney who has extensive international tax experience specific to FBAR compliance. At the Tax Law Office of David W. Klasing, we have devoted much of our practice to assisting and representing expatriates and citizens abroad, giving our dedicated team of tax professionals a deep and nuanced understanding of FBAR laws and how to navigate them successfully. When you are represented by one of our experienced tax lawyers, tax preparers, or CPAs, you can feel peace of mind that you are receiving dependable advice and zealous advocacy. To arrange a reduced-rate consultation concerning an FBAR, a federal income tax return, or related tax issues, contact the Tax Law Office of David W. Klasing online, or call today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
Foreign income and information non-compliance
https://www.youtube.com/watch?v=g2UlIE8oxPA
Here is a link to our practice video on warning signs than an audit has gone criminal.
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https://www.youtube.com/watch?v=saJLVlER-iM
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So, you cheated on your taxes and you are under a tax audit…
https://www.youtube.com/watch?v=FZce4jqQJpI
Why should I hire a tax attorney to represent me in a tax audit?
