Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities, or other types of financial accounts in a foreign country), if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government each calendar year.
The government uses this reporting mechanism as a means to uncover hidden foreign accounts and ensure that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether they have a reporting requirement.
Reporting is accomplished by filing a “Report of Foreign Bank and Financial Accounts”—more commonly referred to as the “FBAR”—which is due on or before June 30 of the succeeding year. Thus the FBAR filing for the 2010 year is due on June 30, 2011. This report is filed separately from the taxpayer’s income tax return, and no extensions of time are available for filing this form. In addition, taxpayers generally are required to answer “yes” or “no” to questions related to foreign bank and financial accounts on their tax returns.
Penalties for failing to comply can be draconian. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations.
Overlooked Accounts – Many taxpayers overlook the fact that they have a reporting requirement in situations such as the following:
- Family Accounts – Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in the foreign country. This is common practice for some ethnic groups. The taxpayer does not really consider the account his or hers, but it falls under the reporting requirement if he or she has signature or other authority over the account and the value exceeds $10,000.
- Inherited Accounts – Accounts in a foreign country and inherited fall under the FBAR reporting requirement even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.
- Business Accounts – An officer or board member may have signature authority over a business account held in a foreign country and overlook the need to meet the FBAR reporting requirements.
In addition to including any reportable foreign income on one’s tax return, a taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR is filed when required.
If you should have filed the FBAR form in prior years but failed to do so, the IRS has a voluntary disclosure initiative in effect through August 31 of this year. This initiative provides for reduced penalties for those who come forward and pay back taxes and penalties on unreported foreign income for prior years.
If you have questions regarding this reporting requirement, please contact this office.