by Brian Mahany
It appears that in the middle of the night, the Senate passed a budget measure to keep us from careening over the fiscal cliff. Technically, the House has not yet passed the measure but is expected to do so today. With all the focus on the fiscal cliff, the Alternative Minimum Tax and the “Bush era tax cuts,” attention has temporarily shifted away from unreported foreign accounts. Unfortunately, those rules and regulations are still with us.
Like last year, U.S. taxpayers with “specified foreign assets” generally must report those assets. The reporting is due every year meaning that merely because you reported your foreign accounts last year doesn’t get you off the hook this year.
The definition of a qualifying foreign asset is a big tricky.
First, the definitions differ. The Bank Secrecy Act – which gives rise to the annual Report of Foreign Bank and Financial Accounts or FBAR form – uses a slightly different definition than the new Foreign Account Tax Compliance Act or FATCA law. For most people, ownership or signatory authority in a foreign bank or brokerage accounts is what triggers these laws and reporting requirements.
Some other assets or interests may also trigger reporting requirements. Consider these possibilities:
* ownership of foreign real estate through a corporation or trust (some foreign countries do not allow direct ownership of real estate by foreigners)
* foreign insurance products with an investment component
* being the beneficiary of a foreign trust
* being the beneficiary of a foreign pension or retirement account
* being added to someone’s account as an additional signer
* having ownership in a foreign business
As noted above, the rules are different for FATCA and FBARs. A good accountant with foreign reporting experience should be able to help with most situations. If you have foreign business interests or have not filed for past years, seek an attorney as soon as possible.
FBARs must be filed annually by June 30th. They are not filed with your income tax return. The new FATCA form, however, is filed with your tax return. You could be required to file one or both. Remember, the rules are different and filing one does not relieve you from filing the other.
The penalties for not filing FBARs are particularly severe. If the violation is willful, the penalty can include a 5 year prison sentence. Most people are not at risk for criminal prosecution but the civil penalties are almost as onerous. The IRS can impose penalties of up to $100,000 per year per account or 50% of the account balance per year for each year an account was not reported. That means if you have a $200,000 account that wasn’t reported for several years the entire balance could be wiped out in penalties in as little as 2 years!
The IRS is currently running an amnesty program for those not in compliance. There are also special programs for Americans living overseas, people with small balance accounts (under $75,000) and U.S. taxpayers that inherited an account or have an interest in one but didn’t access the account or set it up. Obviously, the rules can be quite complex and competent legal assistance is essential.
We have found that most people with unreported accounts are dual nationals, foreign born Americans and Americans who live or work overseas. We have also seen reporting problems with green card holders that are citizens of another country but live and work here.
The best defense is to figure out now if you have a foreign reporting requirement. As noted above, a bit of preventative medicine and a good accountant can help you avoid problems later. Next year foreign banks will be required to share information with the IRS and already, the number of tax exchange agreements between the various nations of the world are at a record number. The era of hiding money in numbered Swiss accounts is dead.
If you think you have a problem for prior years, give us a call. Simply filing the required FBARS and FATCA forms this year will probably not work. Nor will quietly filing the back years help you avoid the huge penalties. The IRS has specifically warned taxpayers not to attempt these so-called “quiet disclosures.” The current FBAR amnesty program – called the Offshore Voluntary Disclosure Program (or “OVDI” / “OVDP”) doesn’t have an expiration date but you become immediately ineligible if the IRS finds you first! That means if you have a problem for past years, amnesty or one of the other programs may be the best option.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. Services available nationwide.