Do You Have Undisclosed Foreign Accounts or Assets?

By Team HRH | February 21, 2017

By Pete Lachance, CPA and Partner, and Shannon Hudson, CPA and Manager at Howe, Riley & Howe, PLLC

Over the past few years our firm has seen a dramatic increase in the number of new clients who have come to us seeking assistance with unreported foreign accounts or foreign financial assets. Typically, it’s not because taxpayers were trying to hide assets and income overseas, but rather because taxpayers are unaware of their foreign compliance requirements.

Regardless of your situation, the penalties for non-compliance can be severe (up to $10,000 or more in some circumstances). Fortunately, there are IRS/Treasury programs in place that allow taxpayers to eliminate or reduce these penalties and let taxpayers sleep a little better at night.

The following walks you through the basic definitions and thresholds that trigger a filing requirement, the potential penalty exposure for non-compliance, and the options available to those taxpayers who find themselves in this unfortunate situation.

Who is subject to Foreign Reporting?

In general, if you are a U.S. taxpayer and have a financial interest in or signature authority over any foreign account or foreign financial asset, you most likely have an obligation to report such account and the applicable income to the Internal Revenue Service and/or Treasury Department. A U.S. taxpayer includes individuals, resident aliens, certain non-resident aliens, trusts, estates and domestic entities. There are also indirect ownership rules to consider (such as a majority owner of a business entity).

What is a Foreign Account or a Foreign Financial Asset?

The most common foreign financial accounts that are to be included on both the FinCEN Form 114 and Form 8938 include savings, checking, deposit and brokerage accounts held with a bank or broker-dealer.

Other assets that must be disclosed on Form 8938 and/or FinCEN Form 114 include stocks or securities issued by a foreign corporation; a note, bond or debenture issued by a foreign person; interest rate and currency swaps; a foreign partnership interest; an interest in a foreign retirement or deferred compensation plan; an interest in a foreign estate; and any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.

While the above list contains the more common assets and most often missed items, it is by no means an exclusive list of all foreign accounts and financial assets to be reported.

What are the Thresholds for Reporting?

Form 8938 – Statement of Specified Foreign Financial Assets:

  • Specified individuals living in the U.S. that are single or married filing separately (MFS) with foreign assets more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year are required to file. The threshold for married filing jointly (MFJ) is $100,000 and $150,000, respectively.
  • Specified individuals living outside the U.S. that are single or MFS with foreign assets more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the year, are required to file. The threshold for MFJ is $400,000 and $600,000, respectively.
  • For tax years beginning after December 31, 2015, certain domestic corporations, partnerships, and trusts that are considered formed or obtained for the purpose of holding, directly or indirectly, specified foreign financial assets must now file Form 8938 if the value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the year.

FinCEN Form 114 – Report of Foreign Bank and Financial Accounts (FBAR):

  • Taxpayers with an aggregate value of all foreign financial accounts that exceeds $10,000 at any time during the calendar year.

What are the Penalties for Non-compliance?

Form 8938 – Statement of Specified Foreign Financial Assets:

  • Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a maximum potential penalty of $60,000. Criminal penalties may also apply.

FinCEN Form 114 – Report of Foreign Bank and Financial Accounts (FBAR):

  • If non-willful, up to $10,000. If willful, up to $100,000 or 50% of account balances. Criminal penalties may also apply.

What if I’ve reported all my Foreign Income but just haven’t filed the Foreign Tax Forms?

You are not alone, as this is a very common scenario. Provided that the failure to file was non-willful conduct and all of the related income was reported on your tax return, you may be able to amend prior year tax returns and/or file delinquent FBARs which include reasonable cause language. An example of non-willful conduct may be that your prior accountant did not make you aware of the foreign filing requirements.

I’m Delinquent, What do I do?

All income was reported:

Delinquent International Information Return Submissions Process:

  • Used if the failure to file was due to non-willful conduct.
  • File amended U.S. tax returns (Form 1040X) to include any delinquent Forms 8938 with a statement explaining reasonable cause.
  • File the last six years of delinquent FBARs according to the instructions, including a statement explaining why they are being filed late.
  • Are not under civil examination or a criminal investigation by the IRS.
  • Have not already been contacted by the IRS about the delinquent information returns.
  • A risk of being examined by the IRS and the potential of criminal penalties does exist under this approach.

All income was not reported:

IRS Offshore Voluntary Disclosure Program (OVDP):

  • Used if the failure to file was due to willful and intentional neglect.
  • File eight most recent years of non-compliant returns.
  • Cost of filing is 27.5% offshore penalty on the aggregate highest account value.
  • Main incentive offered is protection from criminal prosecution and possible imprisonment.

Streamlined Offshore Filing:

  • Used if the failure to file was due to non-willful conduct.
  • File three years of amended US federal tax returns and six years of FBARs.
  • Cost of filing is a 5% streamlined offshore penalty on account balance.
  • There is some audit risk using this program, however the IRS will not impose the civil failure to file penalties (i.e. $10,000 per year).

For further information and guidance related to this topic, please visit the IRS website.

This information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Any tax advice contained in this communication is not intended or written to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties.

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