There are many legitimate reasons that you may have a foreign bank account.
Perhaps you live abroad (six million Americans do), have dual citizenship, do business abroad, or get more interest from a foreign bank.
Whatever the reason, Americans with offshore accounts are at the top of the IRS’s hit list. If you have a foreign bank or financial account, you need to make sure you properly disclose it to the IRS or you face severe penalties and even jail time!
There are as many as three different disclosure forms you may have to file each year if you have money or other assets in an offshore account:
1. Report of Foreign Bank and Financial Accounts (aka FBAR)
2. IRS Form 1040, Schedule B
3. IRS Form 8938, Statement of Specified Foreign Assets
REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS (FBAR)
The Bank Secrecy Act requires U.S. citizens and resident aliens to report certain foreign accounts to the U.S. Treasury. Although this reporting was legally required as far back as 1970, few Americans knew about it or took it seriously. This all changed in 2008 when Senate hearings resulted in revelations that Americans were hiding millions of dollars in Swiss and other foreign banks. The IRS started to aggressively pursue Americans with offshore accounts.
To comply with the Bank Secrecy Act, you may be required to file an FBAR, which must contain the name and address of each financial institution in which you held an account during the year, the account number(s), and the maximum value of the account during the year. You must file an FBAR if:
1. You have a financial interest in, or signature authority over, one or more financial accounts located outside of the U.S. and
2. The aggregate value of such accounts exceeds $10,000 at any time during the year.
Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, or other account at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included.
If all of your foreign accounts together held more than $10,000 at any time during the year, the FBAR must be filed. For example, if you had two accounts worth $6,000 each, you would have to file an FBAR since the total value of $12,000 exceeds $10,000.
The FBAR is not a tax form and is not filed with your tax return. Instead, you must separately file it with the Treasury Department by June 30th of each year. Obtaining an extension to file your federal income tax return does not extend the due date for filing an FBAR.
Failure to file the FBAR can result in big penalties and even jail time. If your failure to file is inadvertent, your maximum penalty is $10,000. However, if you are found guilty of willfully not filing an FBAR, the fine is $100,000 or half the value of the account, whichever is greater. As a willful violator, you are also subject to criminal prosecution which can result in fines up to $250,000 and jail time up to five years!
WORD OF WARNING ON IRS FORM 1040, SCHEDULE B
On Schedule B of IRS Form 1040, line 7a of Part III asks if you have a financial interest in or signature authority over a financial account located in a foreign country. If you answer YES but don’t file the FBAR, the IRS may consider your failure “willful” which means they can impose the larger fines and jail time penalties.
IRS FORM 8938, STATEMENT OF SPECIFIED FOREIGN ASSETS
In 2010, Congress passed the Hiring Incentives to Restore Employment (HIRE) Act, which created new tax reporting requirements for holders of foreign assets. Form 8938 is similar to the FBAR but applies to a wider range of foreign assets with a higher dollar threshold. The assets covered include all your foreign financial accounts and other financial assets you hold for investment, including foreign stocks, bonds, mutual funds, foreign hedge funds, private equity funds, foreign trusts and estates, and interests in privately held foreign entities.
The threshold amounts vary according to your filing and residence status:
1. If you are unmarried, or married filing separately, you must file if the value of all your specified foreign financial assets exceeds $50,000 at the end of the year or $75,000 at any time during the year. If you live abroad, the thresholds are $200,000 and $300,000 respectively.
2. If you are married filing jointly, you must file if the value exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000 respectively.
The penalties for failing to file Form 8938 are severe but not quite as bad as those you face with an FBAR failure to file. The basic penalty is $10,000 per year but goes up to as much as $50,000 per year if you still don’t file the form after receiving an IRS notice. In addition, a 40% accuracy related penalty and a 75% fraud penalty can also apply if you underpaid tax on income you should have reported.
If you do have a foreign account, make sure you are aware of the rules above and complete the FBAR and income tax forms properly to avoid big penalties and potential jail time for noncompliance. If you are still unsure, seek the advice of a tax professional whom is knowledgeable in this area.
= = =
Learn more about Ribble and his tax assistance for traders here.
= = =
Related Reading:
Trader Tax Time: Deduct Health Insurance Costs
Trader Taxes: Understand The Wash Sale Rule
