FinCEN. IRS. Swiss bank accounts. Cayman Islands. Hidden assets. Subpoenas. Penalties. Disclosure. It seems like the crackdown on unreported foreign assets is in the news regularly. What are foreign assets? To whom should we report? How do we avoid horrific penalties? Can we stay out jail? It is a quagmire.

Let's start simple. The foreign in foreign financial assets means physically located outside of the United States. Financials assets consist of the following:

  • Accounts maintained in a financial institution such as bank accounts (checking, savings, CDs, demand), brokerage and securities accounts
  • Commodity futures or options accounts
  • An insurance policy with a cash value
  • An annuity policy with a cash value
  • Shares in a mutual fund
  • Interests in a foreign partnership
  • Foreign stocks or securities not held in a financial account
  • Interests in foreign trusts

This isn't an all-inclusive list, but it contains most common situations.

Who needs to know this information? The US Department of Treasury is very interested in this information. In fact, they have two branches that take particular interest, FinCEN and the Internal Revenue Service (IRS). FinCEN is the Financial Crimes Enforcement Network. According to its website, FinCEN's mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities. The IRS's stated mission is:

Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

This mission statement describes our role and the public's expectation about how we should perform that role.

  • In the United States, the Congress passes tax laws and requires taxpayers to comply.
  • The taxpayer's role is to understand and meet his or her tax obligations.
  • The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.

FinCEN regulates and requires reports from banking institutions, money services businesses, insurance industries, precious metals/jewelry industry, mortgage companies, brokers, and everything in between. The form individuals, businesses, and trusts need to be concerned about is FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces Form TD F 90-22.1 used in the past. The form must be filed by a "United States person" whose interest in or signature authority over aggregate foreign assets exceed $10,000 at any time during the year. The FBAR must be filed electronically by the following June 30th. There is no extension. For these purposes, a United States person means an individual US citizen or US resident or a corporation, partnership, limited liability company, trust, or estate formed under US laws, or these entities created or organized in the US.

The IRS has a plethora of forms to complete to indicate your foreign interests:

  • Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
  • Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Section 6048(b))
  • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
  • Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
  • Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities
  • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
  • Form 8938, Statement of Specified Foreign Financial Assets

For this article, we will only focus on Form 8938. Form 8938 needs to be filed by US citizens, US residents and nonresident aliens who are bona fide residents of American Samoa or Puerto Rico or elect to be treated as a resident for purposes of filing a joint return who meet the following aggregate foreign financial asset values.

Living in the US –

Single and Married, filing separate – total specified foreign financial assets more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.

Married, filing joint – total specified foreign financial assets more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year.

Living Abroad –

Single and Married, filing separate – total specified foreign financial assets more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.

Married, filing joint – total specified foreign financial assets more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

If you filed one of the other IRS forms above, you so indicate on the Form 8938 and do not have to duplicate the information. The IRS did recently do away with the requirements to complete Form 8891 for people who are beneficiaries of Certain Canadian Registered Retirement Plans.

So what happens if you don't file? The FBAR carries a civil penalty of up to $10,000 per failure to file. If there is reasonable cause and the balance has been properly reported, the penalty can be waived. If a person willfully neglects to file or properly report an account, the penalties increase to the greater of $100,000 or 50% of the balance of the account at the time of the violation. Willful noncompliance can also carry criminal penalties. The Form 8938 also carries a $10,000 penalty for not filing. If the IRS sends you notice of your failure to file, you have 90 days to comply or be subject to an additional $10,000 per month until you do file up to $50,000. There is also a 40% penalty for any tax underpaid on foreign financial assets not reported. That penalty jumps to 75% if the underpayment is due to fraud. Failure to file Form 8938 can also carry criminal penalties. These penalties are severe to ensure compliance. The government has procedures in place to help taxpayers become compliant in cases of non-willful failures to file.

The days of the secret foreign account used to squirrel away "tax-free" money is coming to a close. Last October, fifty-one countries signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. Know your obligations and make sure you let your accountant know what assets you may have so they can assist you in meeting your filing requirements.

Recent Posts

CPAmerica International

Beasley, Mitchell, & Co - Certified Public Accountants © 2011

Designed, Hosted, & Maintained by NMGI WebCare