Foreign Bank Accounts and FBAR Reporting

Mr. Feldman has defended and counseled individuals in connection with foreign bank accounts, FBAR reporting, and individual FBAR obligations. Mr Feldman also has experience with Internal Revenue Service investigations and examinations involving foreign bank accounts.

Foreign Bank Accounts and Foreign Assets

Certain “U.S. persons” as defined by law, including U.S. citizens, resident aliens, and others, are bound by certain reporting requirements relating to foreign bank accounts and foreign financial assets. The Internal Revenue Service requires those persons to report their foreign financial assets by filing a Form 8938, Statement of Specified Foreign Financial Assets. The United States Department of Treasury, through the operation of the Financial Crimes and Enforcement Network (FinCen), also requires a “U.S. person” to file an FBAR, known as FinCen Form 114, due every year by June 30^th.

What is an FBAR?

An FBAR is a document which must be completed by any U.S. person with a foreign bank account where that account held at any point in the calendar year at least $10,000.00 USD. The Form used to complete an FBAR is known as FinCen Form 114 and is submitted electronically through FinCen’s website.

What is a Form 8938 Statement of Specified Foreign Financial Assets?

A Form 8938 Statement is filed with a taxpayer’s Form 1040. A U.S. citizen, resident alien, or certain non-resident aliens may be required to file a Form 8938 if the person holds certain foreign financial assets totaling $50,000 at the end of the year or if the person has foreign financial assets in the amount of $75,000 at any time during the year. Determining what qualifies as a reportable foreign financial asset can be complicated and requires a separate determination. One example of a reportable foreign financial asset might include assets held at a foreign financial institution.

What Happens if I Do Not File an FBAR or a Form 8938 Statement of Specified Foreign Financial Assets?

Failure to file an FBAR or a Form 8938 Statement of Specified Foreign Financial Assets may result in the assessment of civil penalties and may result in a criminal investigation or prosecution or both.

I Have an Undisclosed Foreign Bank Account and/or Foreign Financial Assets. What Should I Do?

Each case involving an undisclosed foreign bank account or foreign financial assets is different and the strategy for one taxpayer might be different than the strategy for another taxpayer.

Some options that might be available to taxpayers subject to FBAR filing requirements and/or foreign financial asset reporting are:

(1) do nothing and hope that the IRS does not call them, conduct an audit, or begin an investigation; (2) amend the tax returns, assuming that an amendment of a tax return(s) is not barred by the applicable statute of limitations, and disclose any unreported income for each tax year at issue; (3) file a delinquent FBAR for the years that a foreign bank account was not reported; or (4) enter into the Offshore Voluntary Disclosure Program, if eligible to enter the program, and disclose the foreign bank accounts and foreign financial assets at issue pursuant to the requirements of the Offshore Voluntary Disclosure Program and agree to pay all applicable penalties under the IRS Offshore Voluntary Disclosure Program.

Depending on the particular case and individual taxpayer, some or none of these options may be available. Instead of spinning your wheels, any person with an undisclosed foreign bank account or foreign assets should consult with experienced counsel before deciding what their options are and what strategy might best serve their interests.

What if I Receive a Letter from a Foreign Bank about an Undeclared Account?

Which foreign institution sent the letter, the source of the income in the undeclared foreign bank account, and other factors, will  help determine how a taxpayer might respond to the letter from the foreign bank. For example, if the letter is from a Swiss bank that letter might request that the taxpayer notify the Swiss Bank whether or not the taxpayer is entering into the IRS Offshore Voluntary Disclosure Program. If the taxpayer does not enter the program, the Swiss Bank by agreement with the U.S. government and the Department of Justice, as part of the implementation of the Foreign Account Tax Compliance Act (FATCA), is obligated to disclose the aggregate amounts of money held in the undeclared Swiss Bank account and therefore might disclose the identity of the account holder to the Department of Justice and the Internal Revenue Service. A taxpayer’s decision regarding whether or not to enter into the IRS Offshore Voluntary Disclosure Program based on letters received from the Swiss Bank or other foreign bank, is a complicated decision requiring the assistance of counsel and a CPA

What are the Penalties if I Do Not Report a Foreign Bank Account or Other Foreign Financial Assets on a Tax Return?

The Internal Revenue Service may assess penalties against persons failing to file timely FBARs. Penalties to be assessed depend on whether the failure to file was “willful.” In cases where the IRS determines the failure to file was willful, the IRS may assess a penalty of $100,000.00 or 50 percent of the account balances. Criminal penalties may apply also. On the other hand, in non-willful cases, the penalty for failing to file an FBAR may be as high as $10,000.00. In willful and non-willful cases though, taxpayers may be positioned to assert certain defenses to eliminate or mitigate penalties.

Penalties also apply even if a taxpayer decides to enter the IRS Offshore Voluntary Disclosure Program. Under the most recent version of the IRS Offshore Voluntary Disclosure Program, effective August 2014, if a taxpayer holds an undeclared Swiss Bank account at one of the Swiss Banks labeled as a “Facilitator” the taxpayer may also be required to pay a significant offshore penalty under the IRS Offshore Voluntary Disclosure Program (50% vs. 27.5%). That offshore penalty is calculated by going back in time several years and determining what the largest account balance was in the undeclared account during those years, and then assessing a penalty in the amount of 50% of that balance (For example: largest balance was 2010 and the balance was $1.2M, then the offshore penalty is $600,000).

The Internal Revenue Service may also assess penalties against persons failing to report their foreign financial assets, assuming they are required to file and in cases where the IRS believes the failure to file was “willful” criminal penalties may apply.

Can a Taxpayer Amend Their Returns To Include Foreign Financial Assets?

If the statute of limitations for amending the tax return at issue is still open, then a taxpayer might amend the return to include the unreported foreign financial assets and complete any other forms required to be filed with the return. Determining whether an amendment is the best strategy for the taxpayer is something that should not be done without the assistance of a CPA and/or experienced counsel.

What if I Receive Money from a Person Outside of the United States?

If a taxpayer receives money from outside of the United States, the taxpayer may be required to report the money received. Form 3520 and Form 3520A are the forms that might apply in this situation, but, depending on the source of the money, corporation, foreign person, or trust, or the reason why the taxpayer received the money from overseas (Is it a gift? Is it a distribution from a trust or a corporation?) the reporting requirements might change and the taxpayer might be required to complete additional forms. If a taxpayer fails to file certain forms with the IRS relating to money received from outside of the United States, penalties may also be applicable.