by Brian Mahany
The IRS and CPA community has done an abysmal job of educating U.S. taxpayers with offshore accounts or income about their IRS filing obligations. The Offshore Voluntary Disclosure Initiative ended last fall, yet we still receive calls daily from clients just learning of their reporting obligations. These aren’t tax cheats or people trying to hide money from Uncle Sam. Instead, they are Americans living overseas, foreign born Americans who still have accounts or family in their old country and dual nationals. Just as people are finally learning of their foreign reporting and FBAR filing requirements (more on that below) comes the new FATCA statute.
For those who don’t know what FATCA is, it is an abbreviation for the Foreign Account Tax Compliance Act and its now the law of the land. What does it mean for taxpayers with offshore assets? Plenty.
U.S. taxpayers with offshore bank or financial accounts (including brokerage accounts) have always had to report those accounts to Uncle Sam. These accounts are annually reported on a Report of Foreign Bank and Financial Account or “FBAR” form. The FBAR is a U.S. Treasury Department form, although it is processed by the IRS. Foreign accounts are also reported on Schedule B if you are a long form filer. (If you haven’t filed an FBAR, look at your previous tax returns and see if you filed a Schedule B “Interest and Ordinary Dividends” form. There is a question that asks if you have signature authority or an ownership interest in a foreign account. If you checked “no”, contact a tax lawyer immediately.)
Owning an offshore isn’t illegal but failing to tell the IRS about it is. In fact, its a felony if the IRS can show you acted “willfully”. Failing to report the income, interest or dividends from your offshore accounts is also illegal.
The FBAR form refers to bank and foreign financial accounts and must be filed if your foreign holdings exceed $10,000 during the tax year. FATCA, however, adds new forms and rules to the mix.
Under the recently enacted FATCA statute, U.S. taxpayers now must also complete another form, this one called a Form 8938. The requirement is triggered by ownership in certain foreign financial “assets.” For individuals, the filing threshold is generally $75,000 during the tax year or $50,000 during the last day of the tax year. Married taxpayers that file jointly and taxpayers living abroad have different requirements.
There are exceptions for taxpayers that have their account in a U.S. branch of a foreign bank or a foreign branch of U.S. bank.
The 2011 tax year is the first year for these filing requirements. In other words, as you file your return this year for 2011, the new rules apply.
Now more than ever its important to have professional help when dealing with foreign accounts. Don’t rely on your tax preparer to get it right, many have no understanding of the new law. If you have foreign income or accounts, ask your CPA if he or she has foreign reporting experience. If not, find someone who does.
Uncle Sam continues to root out taxpayers with unreported accounts and assess penalties. Don’t let yourself be dragged into a lengthy and expensive audit. (The cumulative penalties for not filing an FBAR and FATCA form 8938 can easily exceed 50% of the account balance for just 1 year!)
If you have unreported foreign financial assets, offshore bank accounts or think you may have a problem with past year returns, give us a call. Our tax attorneys have helped many people with a wide variety of offshore tax problems including unreported income, OVDI and amnesty applications, audit defense, voluntary disclosure and FBAR filings.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine, San Francisco, California (satellite) and Minneapolis, Minnesota. Services available in most locations.