Perhaps, the number one IRS audit risk for many taxpayers will be the failure to report foreign bank accounts. There it is. I said it. Plain and simple. If you have a foreign bank account and you’re not reporting it to the IRS, you’re taking a huge risk, and I believe that sooner or later, you’re going to get caught.
Just because you never had a problem before, doesn’t mean you’re not going to have one now. Why? Perhaps the biggest area in which the IRS is now concentrating its focus on the collection of unpaid taxes – primarily that of US taxpayers who have financial interests abroad.
There have been, and will continue to be, many reciprocal agreements of sharing information between foreign banks and foreign countries with the US taxing authorities going forward.
And why not? Through the Foreign Account and Tax Compliance Act (FACTA) the program has been extremely successful in catching tax cheats and getting more money in taxes – and all without raising the individual or corporate tax rates. In June 2012, the IRS reported collections of over $5 billion in back taxes, interest and penalties from over 33,000 voluntary disclosures [IR 2012-64].
Foreign Bank Account Reporting
There are three general individual filing requirements, reported separately on three different tax forms:
Form 8938 Statement of Specified Foreign Financial Assets
You have to report foreign bank accounts when your aggregate holdings exceed $10,000 on any one day of the tax year. That’s in the aggregate – which means the total of any bank accounts you may have on any one day.
Schedule B Form 1040
If you have earnings from that account, you need to include this on your tax return and pay the taxes.
Form 114 Report of Foreign Bank and Financial Accounts
Previously, you would file a Form TD F90-22.1 by completing the form and mailing it to the IRS. Beginning late 2013, the form is now filed electronically with the Financial Crimes Enforcement Network (FinCEN) for current and past tax years.
For a comparison of Forms 8938 and Form 114 go HERE.
Penalties for Not Reporting Foreign Bank Accounts
Don’t report it and your penalties can be huge. For US residents there is a civil penalty of $10,000 for each non-willful violation. If you willfully violate the rules, you could be looking at $100,000 or 50% of the amount in each account for each violation. And to make matters worse, each year you didn’t file is a separate violation. Criminal penalties are even harsher – up to $250,000 fine and 5 years imprisonment. In certain cases, it can even double that and is on top of the civil violation.
Who Should Report Foreign Bank Accounts?
You don’t even have to own the foreign accounts – as long as you “control” the money; that is owner, agent, representative, etc. you have a reporting requirement. The rules require foreign bank account reporting by all foreign persons. A person is any US citizen, resident, corporations, partnerships, limited liability companies (LLCs), trusts, etc. In other words, no one escapes the rules. There are certain exceptions such as accounts jointly held by your spouse, etc., but these are fairly limited.
Where is this Reported?
You report your foreign bank accounts separately from filing your tax returns. Previously, you would file a Form TD F90-22.1 by completing the form and mailing it to the IRS. Beginning late 2013, the form is now filed electronically with the Financial Crimes Enforcement Network (FinCEN) for current and past tax years.
When is this Required?
You’re likely already late. You’re required to comply with this reporting requirement on, or before, June 30th of the following tax year.
Recent Procedures Enacted to Catch Foreign Bank Account Holders
First, you’re now required to include other foreign financial assets in addition to bank accounts. Before, only bank accounts were included.
Second, reporting your foreign bank account information used to be reported on Form TD F90-22.1 by completing the form and mailing it to the IRS. Beginning late 2013, the form is now filed electronically with the Financial Crimes Enforcement Network (FinCEN) for current and past tax years.
Third, every so often I read that another bank or foreign jurisdiction has entered into an information sharing agreement with the IRS. Recently enacted legislation called FACTA coerces all foreign banks starting in 2014 into reporting the existence of US account holders or be faced with receiving only 70% of the funds transferred to them by US banks from US residents.
Unfortunately, since your audit exposure for what you fail to report now may continue for several years hereafter and if you get caught, you’re likely looking at several years worth of penalties.
What Should You Do?
Now I’m not here to scare you, nor I am I telling you this just to get your business. I’m telling you this to get you to voluntarily disclose what you’ve got and pay a few bucks now, rather than deal with a significantly greater problem later.
In most cases, a quiet offshore voluntary disclosure can be my best tax advice. In other cases, its not. Taxpayers continuing to have undisclosed foreign financial accounts must seek the advice of competent tax advisors before deciding to participate in the offshore voluntary disclosure program (OVDP), file amended or delinquent tax returns, FBARs or pursue some other avenue of compliance.
In the voluntary disclosure program, you simply disclose before you get caught and pay whatever additional taxes you owe. Chances are that your foreign accounts are not all that large anyway and the related taxes are minimal. But get lazy, don’t do it, and get caught and you may get a whole lot more than you bargained for.
Contact us to schedule a paid tax consultation to review your options and help.