Do you own or control any foreign financial accounts — such as bank accounts, brokerage accounts, mutual funds or trusts? If so, it’s critical to understand your reporting obligations.
If you have a financial interest in or signature authority over any foreign accounts or certain other foreign assets, you must:
- Disclose their existence by checking the box on line 7a of Schedule B (“Interest and Ordinary Dividends”) of Form 1040.
- Provide account details on Form 8938 — “Statement of Specified Foreign Financial Assets” — if the total value of your specified foreign financial assets exceeds $50,000 ($100,000 for joint filers) at the end of the tax year or exceeds $75,000 ($150,000 for joint filers) at any time during the tax year.
- File FinCEN (Financial Crimes Enforcement Network) Form 114 — “Report of Foreign Bank and Financial Accounts (FBAR)” — if the aggregate value of your foreign accounts exceeds $10,000 at any time during the calendar year. The form must be filed electronically with FinCEN no later than June 30 of the following year.
If you fail to comply, the IRS can go back three or six years (depending on the applicable statute of limitations ) to collect back taxes, interest, a 20% or 40% accuracy-related penalty and, in some cases, a 75% fraud penalty. In addition, nonwillful failure to file FBARs is subject to penalties up to $10,000 per year. Willful violation carries a penalty up to the greater of $100,000 or 50% of the account value. You could even be at risk for criminal prosecution.
What to do about it
If you have undisclosed foreign accounts, consider entering the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). Given the IRS’s aggressive efforts to uncover hidden foreign accounts, entering the OVDI is likely a good idea. You avoid criminal prosecution and generally pay lower penalties than you would if the IRS discovered the accounts.
Under the current program, you pay up to eight years of back taxes plus interest, a 20% accuracy-related penalty and a penalty equal to 27.5% of the highest account balance in the previous eight years. The 27.5% penalty is subject to certain limited exceptions that could reduce it to as low as 5%. Once you’ve entered the OVDI, you can opt out if you believe your liability would be lower outside the program.
Don’t risk the penalties
As you can see, reporting your offshore accounts to the IRS is essential. Your tax advisors can help you weigh your options and choose the best strategy.
If you have any questions regarding this article, please contact Friedman LLP at firstname.lastname@example.org or 877-538-1670.