Have a foreign bank account? That is perfectly legal IF you remember to let Uncle Sam know. After many well publicized prosecutions and civil suits, Americans seem to be disclosing their foreign bank accounts in record numbers according to a just released treasury report.
Many Americans maintain foreign bank accounts. Some do so to help family members who live outside the country. Others do so out of fear of a U.S. banking collapse. And some hope to evade taxes and hide their income and assets from Uncle Sam. If the figures released from the U.S. Treasury Inspector General for Tax Administration are correct, playing “hide and seek” with Uncle Sam is getting dangerous.
Having a bank account outside the U.S. is not illegal if you report your interest income each year and if you disclose the account. Generally, accounts with a balance of $10,000 or more must be disclosed each year on a Report of Foreign Bank and Financial Accounts or FBAR as they are commonly called. The FBAR filing is separate from one’s yearly tax return.
Beginning in late 2008, the government began a serious crackdown on Americans with undisclosed foreign bank accounts. The UBS prosecution and criminal indictments against U.S. account holders have dramatically increased awareness of the filing requirements. By taking on Swiss banking giant UBS and the Swiss government and by locking up a few U.S. taxpayers who had not filed required FBARs, taxpayers have begun filing in droves.
According to the Treasury report, FBAR civil penalty collections have grown from $4.2 million in 2004 to a record $20.5 million last year. That’s an increase of 444%.
The IRS has also started many more investigations. Those have increased from 334 in 2004 to 656 last year.
How many Americans are not filing FBARs and not disclosing their foreign accounts? That is hard to say. Most people that refuse to file have accounts in so called bank secrecy jurisdictions. They have opened accounts where banking laws do not require banks to disclose account holder information.
Failing to report is like playing a game of roulette. Sometimes the IRS is successful in forcing a foreign bank or the bank’s host country to disclose the identities of U.S. account holders. In one case, Germany simply bribed a Liechtenstein banker and paid millions of dollars to steal the list (Germany reportedly shared the list with the U.S.). In many cases, however, the taxpayers remains under the radar screen and is never caught.
What happens if caught? The penalties are staggering. If the reason for the failure to report is mere negligence, the fine could be as little as $500 or as high as $10,000. But if you deliberately concealed your account and failed to file the annual report, the penalties can be the greater of $100,000 or 50% of the amount in the account at the time of violation.
If that isn’t enough to scare someone, willfully failing to report an account can be punishable by up to 10 years in a federal prison and a $500,000 fine.
Higher penalties, increased investigations and some high profile prosecutions have made many taxpayers begin to voluntarily report.
If you have a foreign bank account, make sure your tax preparer is familiar with federal reporting requirements. Those requirements are usually as simple as filing an annual disclosure with the IRS.
If you have not reported and wish to begin or have received a notice from the IRS, contact a competent tax lawyer immediately. It is possible to avoid prosecution if you contact the IRS before they contact you.