The IRS Probably Knows (or will soon know) About Your Foreign Bank Account
Congress has known for decades that American citizens are hiding money offshore. Congress finally decided to give the IRS some strong enforcement tools and enacted the Foreign Account Tax Compliance Act (FATCA) back in 2010 to combat the offshore problems. Under FATCA, American taxpayers now must report their foreign bank accounts, ownership of foreign companies and investments on their income tax returns, in addition to the already required FBAR form. The Treasury Department was also given the power to negotiate with foreign governments to sign Intergovernmental Agreements. Under these Intergovernmental Agreements, foreign banks must inform the Treasury about foreign accounts owned by Americans.
The Treasury Department has negotiated Intergovernmental Agreements with more than 100 countries. Unless you have your money in countries that don’t like America, such as North Korea, Iran and Venezuela, the country where you have a foreign bank account probably signed an Intergovernmental Agreement with the Treasury Department. The IRS has slowly rolled out the enforcement of FATCA and some foreign financial institutions started reporting American accounts on March 31st with even more reporting on September 30th. If you have not received a notice from your foreign bank yet regarding FATCA compliance, you probably will soon.
FATCA creates a lot of problems for taxpayers. To start there is a whole new set of IRS forms that taxpayers need to be familiar with and must attach to their income tax returns. If a taxpayer owns a foreign account that needs to be reported but does not attach the right form to their income tax return, the statute of limitations to audit that foreign information may not begin to run.
The failure to file a necessary FATCA informational return can also have civil and criminal penalties. The minimum civil penalty is $10,000 and may go up to $50,000 if the IRS gives you a warning to file the necessary form, but you fail to do so. The penalty was intentionally set high to increase the compliance rate. Criminal penalties may be up to 5 years in Federal prison for each failure to file.
In addition to the FATCA requirements, taxpayers must also file a form known as FinCEN 114, Report of Foreign Bank and Financial Account, more commonly known as the FBAR. This form is not filed with the IRS, but a different organization within the Treasury known as the Financial Crimes Enforcement Network, abbreviated as FinCEN. The FBAR is not new, as it has been required since the enactment of the Bank Secrecy Act of 1970. What is new is the fact that enforcement of the form was handed over to the IRS, who has more expertise in catching non-filers.
The threshold for filing the FBAR is much lower than under FATCA. You only need to have a foreign bank account or accounts totaling more than $10,000 at any time during the year, compared to FATCA’s $50,000. The $10,000 is not adjusted for inflation, it is just a flat amount. The FBAR is a very simple form and it is not attached to your Federal income tax return. It is submitted separately with FinCen and can only be efiled. The filing date for the FBAR recently changed and went from June 30 to April 15. You can now get a six month extension to file.
Just like the FATCA forms, if you do not file the FBAR then there is the possibility the IRS will bring civil and criminal penalties. The FBAR penalty is based upon the maximum value held in the foreign account. In some cases, the civil penalties can exceed the offshore account balance. Taxpayers who failed to file the FBAR and want to clean up their past, may do so through an IRS process called the Offshore Voluntary Disclosure Program (“OVDP”). In the OVDP, you pay a reduced penalty and the government agrees to not go after the full penalty or bring any criminal charges if you are accepted into the program and provide a full and complete disclosure. If a taxpayer did not willfully fail to file the FBAR form, they can become compliant under a Streamlined Program where they pay even a smaller penalty or possibly none. However, whether or not your failure was willful or not is a subjective test. Once you enter the Streamlined Program, you become ineligible for the OVDP so you need to consult with an experienced tax attorney before making a decision regarding entering the Streamlined Program or OVDP.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or firstname.lastname@example.org