Regardless of whether you reside in the U.S. or not, if you are a U.S. taxpayer, you may be required to disclose the nature and amount of the assets you control in foreign banks or other financial accounts, depending on the total value of those assets. It is incredibly important that you file your accurate disclosure on time to avoid the potentially severe penalties that may apply. If you have already missed your opportunity to disclose foreign accounts on time, you and your International Tax Attorney and CPA can make use of one of the several programs available to rectify your past noncompliance.
Discuss your concerns about reporting requirements for your overseas assets with the Tax Law Offices of David W. Klasing by calling us today at (800) 681-1295 or visiting the contact us page of our website to schedule a reduced rate initial consultation.
In 1970, Congress passed the Bank Secrecy Act, a package of legislation that was meant to make it harder for Americans to use offshore accounts to conceal their offshore taxable income from the IRS. Included in the legislative effort was the requirement that all taxpayers with a certain amount of assets in foreign control must file an information return known as the Report of Foreign Bank and Financial Accounts, or FBAR.
Though the value of the American dollar has changed dramatically since this time, the reporting threshold has not, meaning that more American taxpayers are subject to FBAR disclosure requirements than ever before.
To enforce the FBAR requirements for a growing number of applicable taxpayers, Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA imposes a withholding tax on any foreign bank or firm that fails to report account balances and transaction details of their American clients to the IRS. The government uses the information they obtain through these disclosures to determine whether taxpayers with foreign assets met their FBAR obligations.
If you are an American taxpayer who has over $10,000 in assets held or controlled by a foreign bank, firm, or other financial entity at any point during the tax year, you are required to submit an FBAR. Whether you resided in the continental United States during the calendar tax year or not has no bearing on the requirement.
The threshold is calculated by combining all foreign accounts. Thus, you must file an FBAR if your combined foreign financial accounts exceeded $10,000, even if no single account reached that value by itself during the year.
The number that the government uses to evaluate whether you meet the threshold is the peak value of the assets during the taxable year. Even if the total value of your assets only exceeded $10,000 for one day out of the calendar year, you still must file an FBAR.
FBAR requirements apply to any foreign registered financial accounts with a positive balance that the taxpayer has signatory authority over. This may include foreign registered checking and savings accounts, individual stock holdings or investment portfolios, pensions, joint accounts, business accounts, life insurance accounts and trusts.
The FBAR is an information return, not a tax return. Therefore, you do not owe the government any payment solely in connection with your FBAR filing. It is quite common that you may already be paying tax on your offshore income generating assets to the government of the foreign country where they are held. U.S. taxpayers are taxed on their worldwide net income. To alleviate double taxation, a foreign tax credit can often be claimed to offset your U.S. tax obligations where income is taxed both offshore and, in the U.S.
However, you will unfortunately owe the government substantial amounts of money in penalties if you fail to meet your FBAR reporting requirements. Even if your failure to file your FBAR was an honest mistake, the penalties available start at up to $10,000 per violation per calendar year. With a 6-year statute of limitations this can amount to $60,000 of penalties. If the IRS concludes that you willfully failed to file, filed incorrectly, or filed late, they could impose a penalty of up to either $100,000 or 50% of the balance of the overseas assets, whichever is greater.
Technically, taxpayers who are required to submit FBARs must file them with the Financial Crimes Enforcement Network (or FinCEN) rather than with the IRS. The FBAR is not filed by mail like a traditional income tax return. Instead, you must file online through FinCEN’s BSA E-Filing System. In your filing, you will need information on hand, such as the entity where the assets are held, the relevant account number, and the peak balance of each account during that tax year.
FBARs are due on the traditional tax return deadline of April 15 but have an automatic extension that gives you until October 15 to properly file. However, for the sake of organization, it is always ideal to file your FBAR at the same time that you file your income tax return. CAUTION, if you file your tax returns on April 17th for example while on extension, and file your FBARS on April 18th, they will be considered delinquent.
If you did not file an FBAR for past taxable years because you were not aware of the requirement, you have more options than just waiting for the government to figure it out.
For taxpayers who were filing their federal income tax returns from abroad but not their FBAR disclosures, the best method is often to use the IRS’s expat streamlined voluntary disclosure program where the taxpayer’s noncompliance was inadvertent rather than willful. Taxpayers that qualify for this program will not face FBAR penalties.
You should not attempt to use any of the available offshore voluntary disclosure programs without the help of a knowledgeable International Tax Lawyer and CPA. Attempting disclosure too late or disclosing incorrect information can have unexpected and often draconian negative effects on your situation, which can leave you even worse off than you were in the first place.
To hear more about the services that our dual licensed International Tax Attorneys and CPAs can provide, call our offices today at (800) 681-1295.