Do you have any money or assets outside the U.S.? Seems like a pretty straightforward question, doesn’t it? Well, a lot of people are surprised to learn that they do have offshore funds. And if they don’t file a certain form with the U.S. Treasury Department by June 30, the minimum late fee is $10,000.
To Print Download my FBAR Filing Requirements Worksheet Click Here
The form in question is known as the FBAR – Report of Foreign Bank and Financial Accounts. This form, FinCEN Form 114, is now filed online. You may file it directly from the Treasury website — but need to set up an account in advance. Or my office can file it on your behalf, directly through our tax software. The purpose of this reporting document is to give the U.S. Treasury Department specific information about all financial accounts that Americans control, worldwide. The idea is to ensure that people are not hiding money offshore and thus not reporting it on their U.S. income tax returns.
Who needs to file this form?
- United States persons who have a financial interest in or signature authority over at least one financial account located outside of the United States; and
- People for whom the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
There are two more conditions that go with this form.
- At the bottom of your Schedule B (where you report dividends and interest), there are two checkboxes. You must check YES, if you are required to file the FBAR. Checking NO can result in that $10,000 fine.
- You must report the earnings on all those overseas accounts — however small the earnings are.
This seems pretty clear, right? So what’s the problem? Where’s the confusion? Here: “financial interest in or signature authority”
This is what gets innocent people caught in the penalty trap.
In fact, did you know that there’s a second form you may have to file if you have assets or accounts overseas? It’s called the FATCA form Form 8938 — Foreign Tax Compliance Act. You file this if your overseas accounts and/or assets exceed certain limits — $50,000 on the last day of the tax year or $75,000 at any time during the tax year ( higher threshold amounts apply to married individuals filing jointly and individuals living abroad).
These are the kinds of assets getting people into trouble
- Your elderly parents in India set you up with the authority to sign on their bank account(s) in case of illness. You meet both definitions (above) — even if you never use the account and don’t think of it as yours and forgot you ever got this power from your parent(s). $10,000 penalty — instantly.
- There’s an inheritance from your aunt in the U.K. The estate attorney controls it all until the details are worked out. But the assets and funds are in trust for you. You didn’t include the earnings on your tax return. Didn’t file the FBAR? That’s a $10,000 penalty — instantly.
- Your family members in the Philippines set up a bank account in your daughter’s name the day she was born. Your parents and other relatives have been adding to it ever since. By age 16, there’s over $100,000 in it. You forgot about it and didn’t know how much money was in the account. You haven’t picked up the income as kiddie-tax on your return, and didn’t file the FBAR. Minimum $10,000 penalty. Since the balance in the account is over $100,000, the penalty could rise to 50% of the account value per year after the reporting is caught up.
Do you think this is extreme? Well, so do many tax professionals, as well as the nation’s Taxpayer Advocate, Nina Olson. In Olson’s January 2014 Annual Report to Congress, she says the FBAR “penalties are often Draconian and may deter other taxpayers from coming into compliance.”
If everyone thinks the penalties are so high, shouldn’t there be an amnesty program to give people a chance to come forward and catch up? There is. It’s called the OVDI – the Offshore Voluntary Disclosure Initiative. It has evolved a little since the IRS started the program several years ago. In order to participate, you must get the IRS’ advance approval. Once approved –your penalties are based on the specific FAQ that applies to your situation.
Suppose your specific situation doesn’t fit perfectly into an FAQ, does the IRS staff have any leeway to give you a customized decision? Nope. Once you opt for the OVDI program, the staff’s abilities are strictly limited to the boundaries of those FAQs. There is no appeal. Once you agree to participate in this ‘amnesty’ program, you have two choices:
1) Pay the taxes and fines, regardless of what they are, based on the FAQs.
or
2) Opt out of the OVDI amnesty program and take your chances. Note: If you do that, the back tax returns and FBAR and FATCA forms will probably go to the same team at the IRS. Only this time, they do have the discretion to take extenuating circumstances into account.
It sounds pretty harsh, doesn’t it?
Please scroll down on this IRS page to see if you have assets that you should have been reporting. If you found anything that applies to you, you’re about to face a tough decision.
- If you do all the reporting and catch up on your own (called ‘quiet disclosure” or “soft disclosure”), you run the risk of an audit and penalties in excess of 100% of the value of those accounts. I just would never want my name anywhere near a soft-disclosure. The IRS said not to do it. I recognize their power, and I would wish it away if that would work.
- If you don’t report the past and just start in the future, you run the risk of even higher penalties. Some attorneys suggest that if the non-disclosure is more than 8 years old, to just focus on filing the more recent years. (This recommendation generated some harsh ethical discussions.)
- If you participate in the OVDI amnesty program, you face a controlled batch of penalties. Which, although lower than 100%, are excessive for the innocent oversight — and perhaps even excessive for the tax evader.
A recent jury trial issued over $2 million in penalties against Carl Zwerner , an octogenarian Florida taxpayer, for failure to comply with these rules. The tax community eagerly anticipated his proposed battle against these penalties based on the excessive fines clause in the 8th amendment to the U.S. Constitution. Winning that case would have provided far-reaching benefits to all those trying to decide how to proceed with their plans to come clean and catch up. Alas, New York attorney Michael J. Miller just learned that Zwerner settled quietly — leaving the constitutional issue up in the air.
Now, it’s time for you to ask yourself, “Do I have offshore accounts?” Remember, these may include pension accounts you won’t be touching until you retire; they might include Social Security-like accounts you didn’t realize were not taxable; foreign-issued life insurance policies with a cash value… and more . If the values at any time during the year exceeded $10,000, that FBAR filing is due on June 30th. You might also be liable for the FATCA form with your tax return. If you have already filed and omitted it, amend — and remember to include the foreign earnings.
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business or accounting question,
and to schedule a consultation.
Tax Laws are complex.
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Chris Whalen, CPA
(732) 673-0510
79 Oak Hill Road
Red Bank, NJ 07701
www.chriswhalencpa.com
