Offshore Accounts and FBAR Requirements
U.S. law has long required taxpayers with offshore financial interests to report their holdings to the IRS. The Bank Secrecy Act requires that a Report of Foreign Bank and Financial Accounts (FBAR for short) be filed if the aggregate balances of offshore accounts exceed $10,000 at any time during the year.
While the FBAR requirement sounds simple, there are many issues that require close attention.
It is not uncommon for foreign taxpayers and expats living overseas to have multiple accounts. If the total of those accounts exceeds $10,000, every foreign account must be reported. That means a taxpayer having a checking account with a maximum balance of $5000, a savings account with a maximum balance of just $100 and a CD worth $20,000 would have to report all 3 accounts.
Definition of “Taxpayer”
We are living in a mobile society. Dual nationals, Americans living overseas (expats), foreign-born Americans, and green card holders are all considered U.S. taxpayers. Many Americans living overseas incorrectly believe they are exempt from the FBAR requirements. Not true.
With an estimated 6 million Americans living overseas, only 600,000 filed returns last year. Compliance is low. Many taxpayers living in the U.S. who send money “home” to relatives also misunderstand their reporting requirements
The FBAR law refers to foreign financial accounts. That includes bank accounts; certificates of deposit; foreign brokerage accounts; offshore hedge funds; precious metal accounts; prepaid debit and credit cards issued by offshore banks; and even certain annuities, deferred compensation arrangements, retirement plans and insurance products with an investment component.
It isn’t necessary to own the account. Just being a beneficiary or having signature authority over the account might trigger reporting.
The FBAR – also known by its Treasury Department form number TD-F 90-22.1 – must be filed annually by June 30th. It is not part of the IRS tax return and there are no extensions. Filing an FBAR for the first time does not cure missing returns for prior years.
FATCA and Form 8938
Beginning in tax year 2011, the IRS also wants taxpayers to report certain foreign financial assets on a Form 8938. Unlike the FBAR form which is strictly driven by the aggregate account balances, the new FATCA form has an income component. That means taxpayers who exceed certain income thresholds must file a form 8938. Unlike the FBAR, the 8938 form is filed with the tax return. (Note the account balance threshold is also different.)
Unfortunately the definitions of what constitutes a foreign financial account differ slightly between the two laws. That means a taxpayer could be required to file an FBAR, an 8938 form or in many instances, both.
One word of caution! Foreign corporate interests and real estate if owned in the form of a trust or corporation may trigger FATCA reporting.
Schedule B 1040 Return
By now, you are probably figuring that the IRS really wants to know about your foreign accounts! Schedule B of one’s individual income tax return also asks about foreign holdings. Read the questions very carefully and remember that even having signatory authority could trigger reporting.
We know many parents and children who add one another to bank accounts to facilitate transfer upon death and to help pay bills. Even if the money isn’t yours, you may have to disclose if you have access to it.
Failure to properly report offshore accounts are some of the highest in the tax law!
Failure to file an FBAR is a felony punishable by 5 years in prison and a $500,000 fine if “willful.”
Failing to check the proper boxes on Schedule B of one tax return can also be a felony punishable by 3 years in prison if willful.
Failure to complete the FATCA form 8938 can result in a $10,000 penalty.
The chances of criminal prosecution are quite low, although the IRS and Justice Department seems to be indicting more taxpayers with unreported offshore accounts than ever before.
Civil penalties for FBAR violations are the real worry. Failure to file an FBAR can subject a taxpayer to a civil penalty of the greater of $100,000 per account or 50% of the highest account balance. These penalties are per account per each year the account was unreported!
If this isn’t enough to scare you, the IRS looks back 8 years.
Although these penalties could easily exceed the value of the account, the IRS generally imposes the penalty on just one year. Still, at 50% that penalty can still sting.
If the failure to report one’s account was not willful, the IRS can impose a lesser penalty of $10,000 per year.
Looking for some good news? In certain circumstances the IRS will waive all penalties. One example is an unreported foreign account that did not generate any unreported income.
If your offshore account generated a profit, interest or capital gain, that “income” must be reported on your US return. The United States is just one of only 2 countries that requires world wide reporting meaning that Uncle Sam wants to know about every dime you make no matter where it came from. Many foreign born Americans simply have no clue that they must report their offshore income here.
If you have an unreported account that generated unreported income, expect not only the harsh FBAR penalties but traditional IRS penalties too.
As noted above, the Bank Secrecy Act has been on the books for a long time. The 1970’s to be exact. Despite the long history of the law compliance has been low.
In 2010 Congress passed the Foreign Account Tax Compliance Act – FATCA. That law is expected to increase compliance and generate an additional $8.7 billion. Beginning next year foreign financial institutions will be required to examine their account base and report account holders with ties to the United States. In other words, Congress is forcing foreign banks and offshore hedge funds to become the eyes and ears of the IRS.
Offshore Voluntary Disclosure Program – “Amnesty”
With millions of unreported foreign accounts, the IRS has been trying to get people to come into voluntary compliance. One method is through the Offshore Voluntary Disclosure Program – OVDI or OVDP for short.
How does it work? Taxpayers who are not under audit or criminal investigation and whose name has not yet been turned over by a foreign bank can enter the program and receive a discounted penalty and be assured of no criminal prosecution. The current amnesty program penalty is a one time 27.5% penalty.
Other Amnesty and Voluntary Disclosure Options
Amnesty is a great deal for those taxpayers who were deliberating hiding money from Uncle Sam. Not everyone falls into that category, however.
Taxpayers with small balances (aggregated balance of under $75,000), so-called accidental Americans, certain expats and taxpayers who inherited an account (but didn’t access it) may qualify for special amnesty programs and greatly reduced penalties.
Taxpayers who believe they can prove their actions were not willful might do much better to go through a traditional voluntary disclosure (sometimes called an opt out). Although there is no guaranty like that found in the amnesty program, taxpayers who prove their innocence might avoid all penalties.
Is it worth it? A GAO audit says that taxpayers who are innocent do better outside of amnesty.
The IRS doesn’t like quiet disclosures. Taxpayers who try this gambit can expect problems down the road. A quiet disclosure occurs when a taxpayer either files a current year FBAR hoping the IRS doesn’t ask too many questions or simply fills out all their missing FBARs and mails them to an IRS service center for processing.
According to the government’s General Accounting Office, tens of thousands of taxpayers have tried this in recent years. While it might take the IRS a few years to catch up, the Service says it intends to pursue these folks.
Going the quiet disclosure route buys some sleep now but in the not so distant future the IRS probably shows up with a huge tax bill.
Do I Need An IRS Attorney?
Yes! The offshore reporting rules are incredibly complex and the stakes very high. We offer a flat fee for our services and are even willing to represent you free of charge if the IRS disagrees with our position and we must appeal to U.S. Tax Court. Few tax lawyers offer that guarantee. And non tax attorneys can’t even represent you in court.
Even if you are already going through amnesty, we can still help you. Many taxpayers lack confidence in their adviser or find themselves in the middle of an IRS audit or amnesty applications and need help.
Often we can help people already in amnesty get a better deal. IRS agents often apply the wrong exchange rate, include accounts that shouldn’t be reportable or fail to use a lower available penalty rate.
What Should I Do Next?
The offshore reporting IRS lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of FBAR and FATCA related problems. (We represent banks, hedge funds and offshore financial institutions as well.) We can help with reporting of foreign real estate transactions, corporations, trusts and gifts too. For more information contact attorney Bethany Canfield at or by telephone at (414) 223-0464. The author of this post, attorney Brian Mahany, can be reached at or by telephone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl is the exclusive legal services provider for FBAR compliance to the CPAmerica organization of accounting firms. We represent clients throughout the world and United States.